ACCT 6202 Exam 1 (Mod 1 - 6)

allocated amount =

# of drivers in object x rate

If revenues are $260,000, contribution margin is $90,000 and profit before taxes are $25,000, then fixed costs must be equal to:

$65,000 Fixed costs = Contribution margin - Profit before taxes = $90,000 - 25,000 = $65,000

The Rich Company leases its copier on an annual basis. The lease fee is $1,600 per year plus $.01 per copy for any copies made over 750,000. If the company made 800,000 copies in Year XXX1, its total copy cost for the year was: A. $1,600 B.$2,400 C.$2,100 D.$1,650

C Total cost = $1,600 + 0.01 (800,000 - 750,000) = $2,100

Blakely charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of machine hours. The following data pertain to the current year: Budgeted manufacturing overhead: $294,000Actual manufacturing overhead: $245,000Budgeted machine hours: 14,000Actual machine hours: 10,000 Overhead applied to production totaled: A. $210,000 B. $343,000 C. $411,600 D. $175,000

Overhead applied = (Budgeted overhead ÷ Budgeted machine hours) × Actual machine hours = ($294,000 ÷ 14,000) × 10,000 = $210,000

The accounting records of Dixon Company revealed the following costs: direct materials used, $260,000; direct labor, $465,000; manufacturing overhead, $375,000; and selling and administrative expenses, $260,000. Dixon's period costs total: A. $635,000 B. $260,000 C. $840,000 D. $1,100,000

Period costs = SGA costs = $260,000

Many decisions often involve qualitative factors. How can you reconcile this fact with the concept of relevant costs?

Qualitative factors are as relevant as quantitative. 3.99 lb of grapes 1.99 lb of less fresh ones $2 more for fresher grapes

If fixed costs are $75,000 and profit before taxes equal $23,000 and varaible costs equal $44,000, then revenue must be equal to:

Revenue = Fixed costs + profit before taxes + variable costs = $75,000 + 23,000 + 44,000 = $142,000

direct labor

Salaries, wages, and fringe benefits for personnel that work directly on the manufactured product

Groceries R Us is considering two different options: install four self-service registers which would increase profits by $1,800, or install 2 additional full-service registers which would increase profit by $400. What is the value and opportunity cost of the option of installing the self-service registers?

Value = $1,800; Opportunity cost = $400

Groceries R Us is considering two different options: install four self-service registers which would increase profits by $1,800, or install 2 additional full-service registers which would increase profit by $400. What is the value and opportunity cost of the option of installing the full service registers?

Value = $400; Opportunity cost = $1,800

The owner of a driving range is trying to determine the value of hiring additional part time help. If she is able to hire someone to work in the shop for 15 hours per week for $15 per hour, she estimates that she can teach approximately 10 additional lessons for which she charges $20 per lesson. The value of hiring a new employee is:

Value of an option is benefit minus cost. Benefit of the option of hiring new employee = 10 X $20 = $200 Cost of the option to hire a new employee = 15 X $15 = $225 Value = Net benefit of the option = $200 - 225 = ($25)

John has three options for summer work. He can do lawn work for $100 per week, babysit for $125 per week, or work at the local pool for $175 per week. All of the options would require approximately 20 hours of work per week. In addition, if he chooses to work at the pool, he will incur $20 in gas costs per week. The opportunity cost if he chooses to babysit is:

Value of option to do Lawn work = $100 Value of option of babysitting = $125 Value of option to work at the local pool = $175 - $20 = $155 Opportunity cost is the value of the best option from among the options that were not chosen. Opportunity cost of option to babysit = value of option to work at local pool = $155

Organize, Inc. has only variable costs and fixed costs. A review of the company's records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $1,600,000 and the cost per unit manufactured totaled $16. On the basis of this information, how much cost would the firm anticipate at an activity level of 210,000 units? A. $3,280,000 B. $3,200,000 C. $3,267,000 D. $3,259,000

Variable cost per unit = (200,000 × $16) − $1,600,000 = $1,600,000 ÷ 200,000 = $8; Anticipated level of 210,000 units: ($8 × 210,000) + $1,600,000 = $3,280,000.

Organize, Inc. has only variable costs and fixed costs. A review of the company's records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $1,600,000 and the cost per unit manufactured totaled $16. On the basis of this information, how much cost would the firm anticipate at an activity level of 214,000 units?

Variable cost per unit = (200,000 × $16) − $1,600,000 = $1,600,000 ÷ 200,000 = $8; Anticipated level of 214,000 units: ($8 × 214,000) + $1,600,000 = $3,312,000.

Which of the following statements is false?

When determining their goals, individuals generally agree on the factors they consider and the importance they attach to the various factors.

Blaster, Inc. recently conducted a least-squares regression analysis to predict selling expenses. The company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of the following statements is false if the primary cost driver is number of units sold?

X represents the number of hours worked during the period

4.54

`

When graphed, a typical variable cost appears as:

a straight line that slopes upward to the right

Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Sales $190,000 Less: Cost of Goods Sold 145,000 Gross Margin $45,000 Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

increase by $14,000 Variable portion of COG = $145,000 - $30,000 = $115,000 Variable cost per unit = $115,000/10,000 = $11.50 Contribution margin per unit for the special order = $15 - $11.50 = $3.50 Contribution from the special order = 4,000 XX $3.50 = $14,000 Income impact of the special order = $14,000

what to do when firms face excess demand

increase prices, expand capacity by outsourcing production and focus on the most profitable product

net benefit =

benefits - associated costs from choosing option can be nonmonetary cost and benefits are subjective so net benefits vary

add or drop product

beware product profitability reports pay attention to avoidable and unavoidable costs relevant costs arent always variable

mixed/semivariable costs

both fixed and variable components

each allocation has 2 steps

calculate rate allocate cost to cost object

what to do when firms face excess supply

can reduce price, running special promos, accept special orders and produce in house instead of outsource

Ability to change capacity in short term/long term

cant change capacity short term but can long term classify decisions as short/long term based on when you reap benefits

relevant costs

change across alternatives

multiproduct CVP

characterize average product with CM = weighted UCM

decision making

choose best option

make or buy/outsourcing

choose between producing a product or pruchasing from a supplier

i/s expenses

cogs selling and admin

completed contract method

company accumulates expenses incurred in an inventory account and states this inventory at cost in the B/S in the yr the project is completed then charged to I/S

product cost examples

consultant salaries travel cost to client cost of merch

segment margin =

contribution margin of seg - traceable fixed cost

3 cost estimation steps

cost behavior cost estimation cost prediction

variable costs

cost change in proportion to activities change

rate =

cost in pool / denominator volume

batch level cost

cost incurred for every batch produced

product level cost

cost incurred for every product produced

unit level cost

cost incurred for every unit produced

leat squares regressions

cost line is positioned so sum of squared deviations between cost line and data points is minimized done with spreadsheet estimated parameters are fixed costs and unit variable cost. estimates confidence intervals for F & V

4 elements of cost allocation

cost pool cost object cost driver allocation volume

A forecast of a cost at a particular level of activity is known as:

cost prediction

facility level cost

cost to sustain organization

direct cost

cost unique to decision option

fixed costs

costs dont change as activities change

period cost

costs other than product cost (marketing and administration)

joint costs

costs that are incurred up to the split-off point; irrelevant

product cost

costs to get a product or service ready to be sold (production)

short term decision making

decisions taken when there is a gap between supply and demand

UCM decreases, profits

decrease

policies and procedures

define acceptable behavior

cost estimation

determine cost behavior use historical data to test model and determien parameters

planning

developing detailed set of operations & financial descriptions to be done in the future

manufacturing oh types

indirect materials indirect labor other costs

decision making in organizations

individual goals & organizations goals conflict so we need to align incentives between individuals and organization

Why might investors prefer an income statement in the gross margin format even though managers might prefer to organize the data in the contribution margin format?

investors prefer an IS with GM over contribution margin because COGS includes allocated fixed costs. these allocated fixed cost measure opp cost of capacity resources. Get idea of profitability after taking into account capacity ressources opp cost

external decision makers

investors, bankers, govt, authorities, shareholders

cost object

items cost are allocated to

Product costs incurred before the split-off point in a joint processing environment are called:

joint product costs

relevant range

limits of cost driver activity within which a specific relationship between a cost and its cost driver will be valid

high low method

look at aggregate cost & related level of cost uses 2 observations to estimate F and V pick data points corresponding to highest and lowest activity estimate slope of cost function using 2 points substitute V into cost function and estimate F

internal decision makers

managers

costs

material purchases direct labor manufacturing OH selling & admin

capacity

max volume of activity that can be sustained with company's available resources

cost

measure of resources given up to achieve a particular purpose

controllable costs

measured relative to status quo, avoidable if you choose another option

Dallas to san Antonio. 320 mile trip want to share cost between 2 families Stan & Amy James Gail & Mark J, G, & M go to Austin (100 mi) M drops J & G back in dallas how to share costs?

method 1 no of families is cost allocation driver cost per family = 400/2 = $200 per family method 2 no of persons cost per person = 400/5 = 80 stans fam = 2 x 80 = 160 james fam = 3 x 80 = 240 method 3 no of passenger miles total miles = (320 x 5) + (320 x 2) + 100 x 3) = 2540 cost per passenger mile = 400/2540 = .1575 cost for S's fam = 640 x 2 x .1575 = 201.58 cost for J's fam = 420 x 3 x .1575 = 198.42

contribution margin statement

mixes cost from different business functions but reports fixed and variable costs separately for short term managerial decisions

traditional income statement

mixes variable and fixed costs but separates production and nonproduction costs

incentive schemes and performance evaluation

motivate employees to consider org goals

Bogata Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata should use:

multiple regression

can period cost be inventoried?

no cant be inventoried and therefore cant flow through inventory accounts

Can focusing on only relevant costs give value

no some cost and benefits may be the same for different options

conversion costs

direct labor manufacturing OH cost needed to incur to convert raw materials into finished good

prime costs

direct materials + direct labor primary inputs in production

cost allocation

distributes common cost among items

nonrelevant costs

do not change across alternatives

short term promotional decisions

dont need status quo but what will change if special promotion is run. net benefit is incremental revenue - incremental costs. positive net benefit will favor promotion

monitoring

enforce policies and procedures

Every relevant cost is controllable. However, not all controllable costs are relevant. Why are these two statements correct?

every relevant cost is controllable because relevant costs differ across different options. 2 car dealers offer the same price. controllable because you may not buy the car. price not relevant if you already made the decision to buy

account classification method

examine all ledger accounts and classify as variable or fixed

A special order generally should be accepted if

excess capacity exists and the revenue exceeds all variable costs associated with the order with no change in fixed costs.

margin of safety MOS

excess of expected (or current sales) over the breakeven sales; percentage of expected sales

percentage of completion method

expenses for each period are charged directly to I/S each year and proportional amonut of the total project revenue is also recognized as income in the year. In this case there is no inventory account.

2 types of decision makers

external and internal decision makers

step costs

fixed for short interval of activity and change for a large change in activity

Consider a consulting firm that com-pletes large software projects that often take two or more years to complete. What is the na-ture of inventory for such a firm? How should it value this inventory?

for long term software 1 of 2 methods is followed 1. completed contract method 2. percentage of completion

financial accounting

fulfills needs of external

managerial accounting

fulfills needs of internal

profit before taxes =

gross margin - selling & admin costs

role of accounting

helps decision makers to measure costs and benefits of decision options

higher fixed costs, _____ operating leverage

higher

tracebility

how much we can relate a cost to decision option

direct costs

identified specifically and exclusively with a cost object in a economically feasible way

product portfolio decisions with scarce resources

identify criteria to rank products in terms of profitability, usually CM per unit of scarce resource allocate scarce resource to most profitable first, then next most profitable and so on

controlling activities

if organization isnt moving in the right direction must make corrections

production efficiency inc, when experience

inc

totals or gross approach

includes noncontrollable costs/benefits to make a contribution margin stmt for each option

Increase in sales volume, profits

increase

indirect costs

not direct cost

pros and cons of least squares regression

objective, uses all data, provides best linear unbiased estimate more computation & statistical knowledge, may not satisfy assumptions behind estimation procedure

special order pricing

one time order for goods

Option 1 - fly into St Louis the day before, rent a room for one night and return immediately after the conference next evening Option 2 - rent a car drive into ST louis the day before the conference and drive back the day after 1 2 Airfare 750 car rental 150 hotel 175, 350 other 125, 225 cash outflow 1050 725

opportunity cost 1 (725) 2 (1050) better option Another factor to consider is strenuous driving

corporate office rent - product or period?

period

fee for attending training seminar product or period?

period

salary paid to office admin product or period?

period

indirect labor

personnel who dont work directly on product

how to align incentives between individuals and organizations

policies and procedures monitoring incentive schemes and performance evaluation

indirect cost

portion of cost related to decision option

UCM =

price - variable cost

product or period? salary paid to consultants

product

travel to client site - product or period?

product

cost of general purpose software product or period?

product/period

operating leverage =

ratio of fixed costs to total costs

direct material

raw material physically incorporated into final product, traced to product in economically feasible way

b/s inventories

raw materials work in process finished goods

variability

relation between costs and activity

cost behavior

relationship between cost and activity

2 approaches to making short term decisions

relevant cost analysis totals or gross approach

demand exceeds capacity

relevant costs will be variable costs associated with special order and opportunity cost of creating the capacity for the special order

capacity excess demand

relevant costs will be variable costs associated with the special order

Sarbanes Oxley

result from corporate scandals

contribution margin of segment =

revenue - variable costs

contribution margin =

revenue - variable costs (production and nonproduction variable costs)

unit contribution margin =

revenue per unit - variable cost per unit

gross margin =

revenues - cost of providing services

directing

run organization on a day to day basis

when are period costs expensed?

same period that they are incurred

5% dec in selling price or 5% dec in variable costs would result in a larger dec in unit contribution margin?

selling price because its larger than variable cost

A restaurant converts inputs into sub-stantially different outputs, a key characteristic of a manufacturing firm. Yet, most would clas-sify a restaurant as a service firm. How would you classify a restaurant? Why?

service becasue the benefit of the product is not received by the customer over a period of time. restaurant patrons receive the benefit while being served

pros and cons of high low method

simple cause you only need aggregate data uses 2 data points, doesnt take into account hierarchical nature of costs

when are product costs expensed?

sold

cost objective

something for which we desire a separate measurement of costs

CVP analysis

study of effect of output volume on revenue, expenses, and NI

segment

subunits of firm

When deciding whether to sell a product at the split-off point or process it further, joint costs are not usually relevant because

such amounts are sunk and do not change with the decision

estimated fixed cost

sum of all fixed costs

allocation volume

sum of cost driver amonuts for all cost objects

at organization level, profit before taxes =

sum of segment margin from all segments - common fixed cost

estimated variable cost

summ of all variable costs

indirect materials

support production process

Why is the contribution margin statement more useful for making short-term decisions than it is for long-term decisions?

the cm stmt separate fixed cost from variable costs. CM = revenues - variable costs. in the short run, fixed costs are not controllable. in the long run, fixed costs are controllable and relevant to decision making

The following costs are relevant to the decision situation cited except: A. the cost of hiring a full-time staff attorney, in a decision to establish an in-house legal department or retain the services of a prominent law firm. B. the remodeling cost of existing office space, in a firm's decision to stay at its current location or move to a new building. C. the long-term salary costs demanded by Joe Torrez (a superstar) and Rip Moran (an average player) in baseball contract negotiations, in a decision that determines the amounts by which ticket prices must be raised. D. the cost to enhance an airline's Web site, in a decision to expand existing service to either Salt Lake City or Phoenix. E. the commissions that could be earned by a salesperson, in a decision that involves salesperson compensation methods (i.e., commissions or flat monthly salaries).

the cost to enhance an airline's beverage service, in a decision to expand existing airline service to either Salt Lake City or Phoenix. Response Feedback: The cost to enhance an airline's beverage service, in a decision to expand existing airline service to either Salt Lake City or Phoenix would not be a relevant cost becasue the enhancement cost is incurred any way irrespective of whether the new service is for the destination of Salt Lake City or Phoenix.

opportunity cost

the potential benefit that is given up when one alternative is selected over another value of the next best option arise all the time

The change in variable costs, for a given change in activity level, can potentially be calculated as:

the sum of the variable costs divided by the volume of activity which is then multiplied by the change in activity level.

The term "contribution margin" denotes:

the value obtained by subtracting variable costs from revenues

cost pool

total costs to be allocated

The break-even point is that level of activity where:

total revenue equals total cost

unit variable cost =

total variable cost/ volume of activity (x)

2 fixed costs

traceable to segment costs common to multiple segments

joint production

two or more products

noncontrollable costs

unavoidable costs

hierarchical cost structure

unit level cost batch level cost product level cost facility level cost

0 / breakeven =

units at break even volume x (P-V) - F

profit before taxes =

units x price - (fixed costs + units x variable)

Which one of the following is a characteristic of managerial accounting?

useful for decision makers internal to the company

cost prediction

using cost behavior to forecast level of cost at a particular level of activity use parameters to forecast costs at a activity level

cost characteristics

variability traceability

I/S Revenue 2435000 COGS 1246760 -------- GM 1188240 Admin costs 425000 selling costs 558950 -------- profit 204290 manufacturing OH = 248750 variable selling costs are sales commision & 5% of revenue Make I/S in contribution margin format

variable manufacturing cost = 1246760 - 248750 998010 v. selling cost = .05 x 2435000 = 121750 total variable cost = 998010 x 121750 = 1119760 total fixed = 248750 + 425000 + 558950 - 121750 = 1110950 Revenue 2435000 VCOGS 1119760 -------------- Contribution margin 1315240 Fixed cost 1110950 ----------- Profit 204290

Haverton Industries is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include

variable manufacturing costs as well as: avoidable fixed costs

breakeven volume

volume of sales at which profit equals 0

planning decisions

what activities to engage in? how to do them? How to deliver them to customers? what inputs do we need?

relevant cost analysis

what info is relevant? - expected revenue or expected cost - differ among decisions

split off point

when joint products are identified as separate products

can product cost be inventoried?

yes inventoried until the product or services are sold - inventoriable costs

learning curve/experience curve

avg labor time per unit dec over time so variable cost per unit dec

where period costs appear in the income statement

below gross margin

% change in profit before taxes =

% change in revenues x (1/MOS)

sales dollars required to meet target =

(F + TP)/CMR

no of units to be sold =

(F + target profit)/UCM

Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,200 machine hours, with the following data being available for the first six months of the year: Month Utilities Machine Hours January$9,200 850 February 8,860 770 March 9,450 860 April 9,860 970 May 10,240 1,000 June 9,650 950

(High − Low costs) ÷ (High − Low Units) = ($10,240 − $8,860) ÷ (1,000 − 770) = $1,380 ÷ 230 = $6.00 variable cost per unit Variable costs (using the high level) = 1,000 × $6.00 = $6,000 Total costs − variable costs = fixed costs (or $10,240 − $6,000 = $4,240).

CMR =

(P-V)/P

control decisions

- evaluate past activities - attempt to improve future activities - set performance targets

assumptions of CVP

- revenues & expenses is linear over relevant range - expect no change in efficiency & productivity - difference in inventory at beginning and end is insignificant - selling, unit variable cost, and fixed cost are known with certainty - single period - product mix to handle multiple products - doesnt address whether existing product mix or capacity is optimal

The Johnson County Arts Foundation aims to promote the appreciation and practice of art in Johnson County and surrounding areas. Consistent with this mission, the foundation sponsors a number of exhibitions, conducts art classes, and promotes local artists. The foundation is considering three ways to raise money toward covering its operating expenses. 1. 2. Host a charity dinner, with each ticket costing $100. The caterer has offered the foundation a $2,000 discount of his usual price. Select donors (who are likely to give money in the future as well) would be recognized and honored during the dinner. Issue lottery tickets ($50 each) for a "dream art vacation" for two to the "world-famous museums of London and Paris." The foundation estimates the cost of the vacation at $6,000. 3. Conduct a silent auction for works by local artists. The artists and the foundation will share equally in the proceeds. The silent auction is a way for artists to gain exposure and potentially sell more of their work. Identify the controllable benefits for each of three fund-raising options. Classify each benefit as being direct (D) or indirect (I) to the decision option. In addition, classify each revenue source as variable (V) or fixed (F).

1. Issue lottery tickets $50 each. Cost of vacation $6k; sale of tickets - direct, variable 2. dinner w/ tickets @ $100. Caterer offers $2k discount. Select donors will be honored sale of tickets - direct, variable discount - direct, fixed goodwill - indirect, fixed 3. auction where artists share proceeds equally will help them gain exposure proceeds - direct, variable exposure - indirect, variable depending on how much they sell/# of artists participating

Framework for decision making

1. Specify decision problem and decision makers goals 2. identify options 3. Measure costs and benefits so that hte net benfits or value of each option can be estimated 4. Choose the option with highest net benefit

4 Types of Organized set of activities

1. decision making 2. planning 3. directing 4. controlling

John has three options for summer work. He can do lawn work for $100 per week, babysit for $125 per week, or work at the local pool for $175 per week. All of the options would require approximately 20 hours of work per week. In addition, if he chooses to work at the pool, he will incur $20 in gas costs per week. The opportunity cost if he chooses to work at the pool is:

125 Find the value of each option as the benefit minus cost: Value of option to do Lawn work = $100 Value of option of babysitting = $125 Value of option to work at the local pool = $175 - $20 = $155 Opportunity cost is the value of the best option from among the options that were not chosen. Opportunity cost of option to work at the pool = value of option to babysit = $125

The owner of a driving range is trying to determine the value of hiring additional part time help. If she is able to hire someone to work in the shop for 15 hours per week for $10 per hour, she estimates that she can teach approximately 10 additional lessons for which she charges $40 per lesson. The value of hiring a new employee is:

250 Value of an option is benefit minus cost. Benefit of the option of hiring new employee = 10 X $40 = $400 Cost of the option to hire a new employee = 15 X $10 = $150 Value = Net benefit of the option = $400 - 150 = $250

Assume you are the owner of a video-rental store. Which of the following would be classified as a long-term decision? A. Deciding whether to purchase a new building B. Purchase of cleaning supplies C. Purchase of children's video inventory D. Deciding whether to hire a summer intern.

A

Which of the following would produce the largest increase in the contribution margin per unit? A. A 7% increase in selling price. B. A 15% decrease in selling price. C. A 14% increase in variable cost. D. A 17% decrease in fixed cost. E. A 23% increase in the number of units sold.

A

Which of the following statements is correct with regard to a CVP graph? a. A CVP graph shows the maximum possible profit. b. A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line. c. A CVP graph assumes that total expense varies in direct proportion to unit sales. d. A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expenses line.

Tomba Civil Engineers' manager is attempting to calculate its cost of providing services to clients. Its profit before taxes for January is $4,000, and it's selling and administration costs are $8,000, service revenue is $20,000. How much is its cost of providing service? A. $8,000 B. $12,000 C. $20,000 D. $4,000

A Cost of providing service = $20,000 - 4,000 - 8,000 = $8,000

merchandising org

A firm that resells essentially the same product it buys from suppliers.

manufacturing org

A firm that uses labor and equip-ment to transform inputs such as materials and com-ponents into outputs.

service org

A firm whose product is neither tangible nor storable.

Which one of the following is a primary user of managerial accounting?

A sales manager of one of the company's divisions

Has 1000 figures that cost $6.25/unit to produce Options: scrap at a cost of $1000 or rework at a cost of $1200 and sell for $750 A) cash flow for scrapping B) cash flow for reworking C) is the $6.25 relevant to your decision?

A) -1000 B) 750-1200 = -450 C) no sunk cost

Natalie's Knick Knacks is a boutique store that sells seasonal merchandise. For this Christmas season, Natalie paid $50,000 for an order of figurines, tree ornaments, candles, and wreaths. Natalie marks up each piece of merchandise by 100% to arrive at the selling price. Thus, if Natalie pays $20 for a figurine, she will price it at $40.Unfortunately, sales were well below expectations, and Natalie's revenues were only $65,000 (far less than the $100,000, or $50,000 × 2, that she had hoped for). This presents a quandary for Natalie, who is contemplating what to do with the unsold merchandise. One option is for Natalie's to store the unsold merchandise for the next 10 months and attempt to sell it the next Christmas season. Natalie estimates that it would cost her $4,000 to properly pack, store, and then unpack all of the unsold merchandise. In addition, because the merchandise would be somewhat dated, Natalie believes that she will only be able to sell 30% of the remaining merchandise the following year (at the current year's retail price). Any unsold items will have negligible resale value, and Natalie plans to donate them to a local charity.Alternatively, Natalie could hold a January after-Christmas sale. Specifically, Natalie believes that she can sell 100% of the unsold merchandise if she holds an "80% off sale," 80% of the unsold merchandise if she holds a "70% off sale," 55% of the unsold merchandise if she holds a "60% off" sale, and 40% of the unsold merchandise if she holds a "50% off" sale. (The % off is the reduction in the selling price; thus, under a 60% off sale, a figurine priced at $40 would sell for $16, or $40 - [.60 × $40]). Natalie would donate any unsold merchandise to a local charity. A) Decision problem? B) Options for N with respect to unsold merch? C) Increase in cash flow for each option? D) Opportunity cost for each option? E) What sales strategy would you recommend to Natalie?

A) Decision problem: what to do with unsold merch? Goal: max profit revenues from selling merch - costs from selling 100k - 65k * .50 = 17500 B) options 1. store merch and sell it next season 2. 80% sale 3. 70% sale 4. 60% sale 5. 50% sale C) dollar value of unsold merch 100K - 65K = 35K Option 1 Revenue next year 35K x 0.3 = 10500 - 4000 storage = 6500 increase in cash flow Option 2 35K x .8 = 28K Revenue 7K % sold 100% inc in cash flow 7K Option 3 35K x .7 = 24500 Revenue 10500 % sold 80% inc in cash flow 8400 Option 4 35K x .6 = 21K rev 14K % sold 55% inc in cash flow 7700 Option 5 35K x .5 = 17500 rev 17500 % sold 40% inc in cash flow 7K D) 1. 8400 2. 8400 3. 7700 4. 8400 5. 8400 E)best option is 3 F)sequential strategy - gradually increase discount 50% off 35K x .5 x .4 = 7000 60% off 35k x .4 x .15 = 2100 70% off 35k x .3 x .25 = 2625 80% off 35k x .2 x .2 = 1400 13125 .55 - .40 = .15 .80 - .55 = .25

Jon purchased 20 gallons of paint for $325. Unique color that few would consider. A) opportunity cost of using paint for a new job? B) Decides to throw paint out. Landfill will charge $40 to dispose ($2/can). What is the new opportunity cost of using it for a new job? C) Jon was paid nonrefundable advance of $350. How does this nifo affect Jons opp cost of uing paint for another job?

A) Unique so $0 B) Jon can avoid this cost by using paint for another job = -$40. Jon should pay someone $40 to let him use paint in their job. C) This doesnt affect opp cost at all. the $350 & cost of paint are in the past and dont affect opp cost. Opp cost is forward looking so answers are the same as A) and B)

Join fitness center for $80 or pay per use $4/visit. Plan to use fitness center once a week or 16 times for the semester A) decision problem B) options C) cash outflow for each option D) best option

A) minimize amount you pay for fitness B) Join fitness center for $80 or pay per visit C) 1. 80 2. 64 D) pay per visit is best option

Homer Enterprises, which produces various goods, has limited processing hours at its manufacturing plant. The following data apply to product no. 607:Sales price per unit: $10.40Variable cost per unit: $6.70Process time per unit: 5.00 hoursManagement is now studying whether to devote the firm's limited hours to product no. 607 or to other products. What key dollar amount (that would be an indicator of the profitability of product # 607 given the constraint) should management focus on when determining no. 607's "value" to the firm and deciding the best course of action to follow?

A. $0.74 Response Feedback: This is a short run maximization problem. So fixed costs are irrelevant and contribution margin is the right profit metric.Contribution margin per unit for product # 607 = $10.40 - $6.70 = $3.70The proper profitability indicator is the contribution margin per unit of constrained resource. Since process time is the constraint resource, calculate contribution margin per hour of process time as equal to $3.70/5.00 hours = $0.74

Managerial accounting is a branch of accounting which:

Assists in making business decisions.

Lusk Corporation produces and sells 20,000 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $21 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $50,000 of the $250,000 in fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the company's overall net operating income would:

A.increase of $20,000 per month Lost contribution margin if product X is eliminated = ($30 - $21) X 20,000 = $180,000 per month.Fixed costs that would be avoided if product X is eliminated = $250,000 - 50,000 = $200,000Net effect on income of the decision to eliminate product X = $200,000 - 180,000 = $20,000

Evaluate the following statements whether they are true: Managerial accounting information is meant to help the employees of an organization in their planning and control decisions. Employees of an organization need the most relevant data, be it financial or non-financial, whenever they need. Managerial accounting uses data from financial accounting system.

All statements are true

Ralston has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead, $169,500; fixed overhead, $270,000. If Ralston now revises its anticipated production slightly upward, it would expect:

Answer: total fixed overhead of $270,000 and the same hourly rate for variable overhead Variable overhead rate per hour and the total fixed overhead cost remain the same at all activity levels within the relevant range

________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. A. Unit level costs B. Product-sustaining costs C. Facility sustaining costs D. Batch level costs

B

Grand Rapids Rafting Company recorded the following data for the month of October: Cost of beginning inventory $46,000 Cost of ending inventory $32,000 Cost of goods sold $122,000 Inventory purchases for the month of October total: Answers:A. $108,000 B. $136,000 C. $44,000 D. $200,000

Beginning inventory + inventory purchase = COG sold + Ending inventory Inventory purchase = $122,000 + 32,000 - 46,000 = $108,000

Phillippe Inc. manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the split-off point, operating income will:

Benefit of further processing = incremental revenue - incremental cost = {($25 - $20)X5,000 pounds} - $20,000 = $5,000

value =

Benefits less its costs

A sunk cost is: A. A cost that does not change as the volume of activity changes B. A cost that can be directly traced to a decision option C. A past expenditure that cannot be changed D. A controllable cost

C

Top management compensation cost is an example of ________ in the cost hierarchy. A. unit level B. batch level C. facility-sustaining D. product sustaining

C

Which of the following is true if the volume of sales increases for a retail firm? A. total fixed costs will increase B. Unit variable cost will increase C. total variable costs will increase D. total variable cost will decrease

C

Galveston Corporation has $200,000 of joint processing costs and is studying whether to process J and K beyond the split-off point. Information about J and K follows. Product J: Tons produced 25000, Separable variable processing costs beyond split-off, Selling price per ton at split-off 15, Selling price per ton after additional processing 21 $64,000 Product K: Tons produced 15,000, Separable variable processing costs beyond split-off 100,000, Selling price per ton at split-off 52, Selling price per ton after additional processing 58 If Galveston desires to maximize total company income, what should the firm do with regard to Products J and K? Should it sell them at split off or process them further? Consider the following choices: A. Sell at split-off J Sell at split-off K B. Sell at split-off J Process beyond split-off K C. Process beyond split-off J Sell at split-off K D. Process beyond split-off J Process beyond split-off K

C Benefit of processing product J beyond the split-off point = ($21-15) X 25,000 - $64,000 = $86,000. Therefore, process product J beyond the split-off point.Benefit of processing product K beyond the split-off point = ($58-$52) X 15,000 - $100,000 = ($10,000). Therefore, sell product K at split-off point.

Two months ago, Air-tite Corporation purchased 4,500 pounds of Hydrol, paying $15,300. Hydrol is the main ingredient for most of the prodcucts manufactured by Air-tite. The demand for this product has been very strong since the last purchase transaction, with the market price jumping to $4.05 per pound. (Air-tite can buy or sell Hydrol at this price.) The company recently received a special-order inquiry, one that would require the use of 4,200 pounds of Hydrol. Which of the following is (are) relevant in deciding whether to accept the special order? A.The 300-pound remaining inventory of Hydrol. B.The $4.05 market price. C.The $3.40 purchase price. D.4,500 pounds of Hydrol. E.Two or more of the other factors are relevant.

C. The current market price of $4.05 per pound.

WUCM =

CM of individual products weighted by the weights in the product mix

Callaway Corp., which began business at the start of the current year, had the following data: Planned and actual production: 40,000 units Sales: 38,000 units at $15 per unit Production costs: Variable: $5 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The contribution margin that the company would disclose on a variable-costing income statement is:

CM per unit = Sales revenue − Variable costs = $15 − $5 − $1 = $9 Total contrtibution margin = $9 × 38,000 = $342,000

Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 5,000 copies and paid a total of $470 in March; in May, the firm paid $350 for 3,000 copies. The company uses the high-low method to analyze costs. Fulton's monthly fixed fee is: (Do not round your intermediate calculations and round your final answer to nearest dollar amount.)

Compute unit variable cost as equal to ($470 - 350) divided by (5,000 - 3,000) = $0.06 Variable costs (using the low level) = 3,000 × $0.060 = $180; Total costs − variable costs = fixed costs (or $350 − $180 = $170); alternatively, Variable costs (using the high level): 5,000 × $0.060 = $300; Total costs − variable costs = fixed costs (or $470 − $300 = $170).

The following costs were incurred in November: Direct materials $16,000 Direct labor 8,000 Manufacturing overhead 10,000 Selling expenses 4,000 Administrative expenses 5,000 Conversion costs during the month totaled: Answers:A. $18,000 B. $34,000 C. $43,000 D. $24,000

Conversion costs = DL costs + Manufacturing overhead costs = $8,000 + $10,000 = $18,000

1. Burning Company produces salsa. The following information is made available to you: Income tax rate 30% Selling price per unit $5.00 Variable cost per unit $3.00 Total fixed costs per year $90,000 Find the annual breakeven volume in dollars.

Correct Answer: $225,000 Response Feedback: Breakeven dollars = Fixed costs/CMR. CMR = $2/$5 =0.40 Breakeven dollars = $90,000/0.4 = $225,000 Or alternatively, first compute BEV in units as Fixed costs divided by UCM. $90,000 / ($5.00 - $3.00) = 45,000 units; Then multiply the BEV in units by unit selling price. 45,000 units x $5.00 = $225,000. Income tax is irrelevant for BEV computation.

A recent income statement of Fox Corporation reported the following data: Sales revenue $3,600,000 Variable costs 1,600,000 Fixed costs 1,000,000 If these data are based on the sale of 10,000 units, the break-even point would be:

Correct Answer: A. 5,000 units CMU = ($3,600,000 - $1,600,000)/10,000 = $200 BEV = $1,000,000/$200 = 5,000 units

For the year just ended, Porter Corporation's manufacturing costs (raw materials used, direct labor, and manufacturing overhead) totaled $1,590,000. Beginning and ending work-in-process inventories were $69,000 and $99,000, respectively. Porter's balance sheet also revealed respective beginning and ending finished-goods inventories of $259,000 and $189,000. On the basis of this information, how much would the company report as cost of goods manufactured (CGM) and cost of goods sold (CGS)? Answers:A. CGM, $1,560,000; CGS, $1,630,000 B. $CGM, $1,620,000, CGS, $1,550,000 C. CGM, $1,660,000; CGS, $1,630,000 D. CGM, $1,520,000; CGS, $1,550,000

Cost of Goods Manufactured = Mfg. costs − change in WIP = $1,590,000 − ($99,000 − $69,000) = $1,560,000 Cost of goods sold = Mfg costs − change in WIP + Change in Finished goods =[$1,590,000 − ($99,000 − $69,000)] + ($259,000 − $189,000) = $1,630,000.

C & C Power Lines is a subcontractor that works on public utilities. Which of the following is a key characteristic that makes it distinctively a service company? Answers:A. Its product costs appear below the line in computing gorss margin B. All of its costs are period costs C. Its products are tangible D. It does not maintain inventories

D

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Raw materials purchased to produce A direct or indirect

D

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Salary of a production employee who works the day shift at the Eastern plant D or I

D

The owner of Mom & Pop's Hardware Store purchased a knife sharpener last year in order to allow the store to offer services in sharpening all types of blades. The cost of the equipment was $5,200 but Pop now feels that the store needs to generate additional revenue of $200 per month in order to make the purchase of the equipment worthwhile. With regard to making the decision of whether to continue to offer the service, the original cost of the sharpener can be considered: A. Mixed B. Relevant C. Controllable D. Sunk

D

Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 14,000 copies and paid a total of $810 in March; in May, the firm paid $710 for 12,000 copies. The company uses the high-low method to analyze costs. Find variable cost per unit

D. $0.050 The variable cost per unit is (High − Low costs) ÷ (High − Low Units) = ($810 − $710) ÷ (14,000 − 12,000) = $0.050 per copy.

The two classes of decision makers requiring two different types of accounting information are:

Decision makers inside the firm and decision makers outside the firm.

You observe that the contribution margin per unit increases by 20%.Which of the following statements regarding "breakeven volume in units" is correct?

Decreases by less than 20% BEV = Fixed cost/UCM

other costs

Depreciation on plant and equipment, property taxes, insurance, utilities

Peyton Manufacturing has the following data: Work-in-process inventory, January 1, 20x8$43,000 Work-in-process inventory, December 31, 20x8 48,500 Conversion costs during the year 415,000 If the cost of goods manufactured for the year was $565,000, what was the amount of direct materials used during the year? A. $140,500 B. $145,500 C. $150,000 D. $155,500

Direct materials used during the Year = Cost of Goods Manufactured − Conversion costs + (Change in WIP balances) = $565,000 − $415,000 + ($48,500 − $43,000) = $155,500

Texas Plating Company reported a cost of goods manufactured of $523,000, with the firm's year-end balance sheet revealing work in process and finished goods of $78,000 and $137,000, respectively. If supplemental information disclosed raw materials used in production of $88,000, direct labor of $145,000, and manufacturing overhead of $246,000, the company's beginning work in process must have been: A. $34,000 B. $52,000 C. $122,000 D. $401,000

Ending work in process + Cost of goods manufactured − Raw materials − Direct labor − Manufacturing Overhead = Beginning Work-in-Process = $78,000 + $523,000 − $88,000 − $145,000 − $246,000 = $122,000.

Emphasis on reliability and verifiability F or M?

F

Frequency of reports quarterly/annual F or M?

F

GAAP, auditing F or M?

F

Type of info considered: past financial data F or M?

F

Unit of analysis entire firm, may be at the level of business or geographic segments F or M?

F

y, total cost =

F + Vx fixed cost F variable cost V x cost driver activity in # of units

Sophie Corporation recently produced and sold 110,000 units. Fixed costs at this level of activity amounted to $59,700; variable costs were $110,000. How much cost would the company anticipate if during the next period it produced and sold 120,000 units? A. $180,700 B. $179,700 C. $169,700 D. $170,000

Find the Variable cost per unit as = $110,000 ÷ 110,000 units = $1 per unit;Predicted variable cost for the next period = 120,000 X $1 = $120,000.Predicted fixed cost for next period should be the same as now.Add the predicted fixed cost and predicted variable costs for the next period to predict the total cost for the next period Cost when 112,000 units are produced = $59,700 + ($1 X 120,000) = $179,700.

During May, Mayer Company's total fixed costs were $5,000 and variable costs were $7,000 when 500 units were produced. How much is total cost for June if 600 units are produced? A. $14,400 B. $7,000 C. $12,000 D. $13,400

Find the unit variable cost when 500 units are produced as equal to $7,000/500 = $14.Total variable costs when 600 units are produced = 600 X $14 = $8,400Calculate the total cost for June as the sum of the fixed cost and the variable costs when quantity of production = 600 units.Total cost when 600 units are produced = $5,000 + $8,400 = $13,400

Callaway Corp., which began business at the start of the current year, had the following data: Planned and actual production: 40,000 units Sales: 38,000 units at $15 per unit Production costs: Variable: $5 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The gross margin that the company would disclose on an absorption-costing income statement is:

Fixed production per unit = $260,000 ÷ 40,000 = $6.50; Calculate the product costs expensed for the period as 38,000 ($6.50+5) = $437,000 Gross margin = Sales − expensed production costs = 38,000 X $15 - $437,000 = $133,000

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Eastern plant rent direct or indirect

I

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Eastern plant utilities and water

I

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Equipment maintenance I or D

I

The AB Corporation makes two products: A and B. Although each product uses a different type of raw material, the firm produces both products in its Eastern plant. The products make use of the same equipment as well. AB produces A during the day shift and B during the night shift. The following list presents six costs incurred to produce A Salary of the Eastern plant manager D or I

I

Consider the following costs and decision-making situations: I. The cost of existing inventory, in a keep vs. disposal decision. II. The cost of special electrical wiring that is required if an equipment is purchased, in an equipment acquisition decision. III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision. Which of the above costs is (are) relevant to the decision situation noted?

II only I is a sunk cost and III is not differential to the decision of department closure (since the organization will continue to incur his salary expense regardless of the decision to close the department) and hence is not relevant to the decision. Only II is a future cost and differential across the decision options. Therefore only II is relevant.

Frequency of reports: depends, can be daily/ hourly F or M?

M

Type of info considered: both financial and nonfinancial past and future data F or M?

M

emphasis: relevance F or M?

M

no regulation F or M

M

unit of analysis: depends on the decision, often microlevel F or M

M

The accounting records of Comacho Company revealed the following costs, among others: Factory insurance$35,000 Raw material used 259,000 Customer entertainment 18,000 Indirect labor 48,000 Depreciation on salespersons' cars 25,000 Production equipment rental costs 75,000 Costs that would be considered in the calculation of manufacturing overhead total: A. $460,000 B. $183,000 C. $158,000 D. $201,000

Manufacturing Overhead Costs = Factory insurance + Indirect labor + Production equipment rental costs = $35,000 + $48,000 + $75,000 = $158,000

Which of the following is not a stage in the planning and control cycle?

Measuring

Optimal decision making process requires

Measuring the costs and benefits of decision options

Evaluate the following statments whether they are true: Managerial accounting information is meant to help the equity investors and credit investors in their planning and control decisions. Employees of an organization need the most relevant data, only if the information that is sought is of financial in nature. Many numbers reported in the financial accounting system are influenced by the managerial accounting system.

Only statement III is true

A useful step in estimating controllable costs is:

Separating variable costs from fixed costs

TP before taxes =

TP after taxes/ (1- tax rate)

Firms promote goal congruence by:

Tailoring policies and procedures to fit the organization's specific needs

Corrine Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?

The company anticipates $495,000 of fixed manufacutring overhad irrespective of the number of machine hours used.

cost driver (cost allocation)

attribute for cost object

Exactly one year ago, Gamma Machinery purchased a lathe for $300,000. At the time of purchase, Gamma expected the lathe to generate a net cash inflow of $120,000 per year for three years. Recently, another firm located in the same industrial park went into bankruptcy. The bankrupt firm's liquidators have offered to sell their client's sophisticated lathe to Gamma for $400,000 even though their client paid $800,000 for it one year ago The bankrupt firm's lathe has a superior control system that would significantly improve Gamma's machining capabilities. Moreover, if Gamma replaces its current lathe, it will be able to increase its net cash inflow to $250,000 per year for each of the next two years. If Gamma purchases the lathe, the company can either retain its current lathe for miscellaneous jobs or sell it. The miscellaneous jobs will produce an additional net cash inflow of $50,000 per year for the next two years. Gamma can sell its cur-rent lathe today for $170,000. Both lathes will be worth $0 in two years. Gamma must decide whether to purchase the bankrupt firm's lathe and, if it does, what to do with its own lathe. Gamma's goal is to maximize its net cash flow over the next two years. Required: a. Identify Gamma's decision options. Is the status quo a feasible option? b. What are the relevant and controllable costs and benefits for Gamma's decision? c. Assume that Gamma is committed to buying the new lathe. Thus, the status quo is not a feasible option. In this case, what are the controllable and relevant costs and benefits for Gamma's decision?

a) 1. keep current lathe and dont purchase new lathe 2. Purchase the new lathe today for $400,000 and sell its current lathe today for $170,000. 3. Purchase the new lathe today for $400,000 and keep its current lathe for two years. b) option 2 (250k - 120k) x 2 = 260K sell lathe +170k cash out flow to buy lathe (400k) ------ net cash flow 30k bet option option 3 260k 100k (400k) ------- (40k)

where product costs appear in the income statement

above gross margin

best method?

account classification best when historical patterns may not continue high low for quick estimates regression for complex cost patterns & historical relations continue

pros/cons of account classification method

accurate, allows for entire cost hierarchy, for new operations, little historical data time consuming, subjective, based on expertise of person doing task

Organizations achieve goals by

acquiring resources hire people organized set of activities

period cost examples

admin salaries travel cost for mkting staff advertising accounting

manufacturing oh

all other manufacturing costs

beware of cost allocation

allocations make it appear as if allocated cost is variable in # of drivers cost may be fixed in short run can lead to error

estimate cost structure

analyze historical cost data first begin with scatterplot of costs & activities - visual of expected relation - may reveal unusual patterns - identify outliers - determine relevant range

cost driver

any output measure for activities that causes the use of costly resources

decision option

anything for which we desire a separate measurement of cost