ACCT 210 Lecture Notes - Lecture 1: Income Statement
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1) All of the following are examples of product costs except:
depreciation on the company's administrative offices.
salary of the plant manager.
insurance on the factory equipment.
rental costs of the factory facility.
2) Period costs:
are treated as expenses in the period they are incurred
are directly traceable to products
include direct labor
are also referred to as manufacturing overhead costs
.
3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:
Direct materials $30
Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85
The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500
d. $102,500
4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:
overstate period expenses on the income statement.
overstate the cost of goods sold on the income statement.
understate the cost of goods manufactured.
have no effect on the cost of goods manufactured.
5) In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.
a. True
b. False
7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.
a. True
b. False
8) Which of the following statements is correct with regard to a CVP graph?
A CVP graph shows the maximum possible profit.
A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
A CVP graph assumes that total expense varies in direct proportion to unit sales.
A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?
| Cost of purchasing clothing | Sales commissions | |
| a. | Product | Product |
| b. | Product | Period |
| c. | Period | Product |
| d. | Period | Period |
10) The principal difference between variable costing and absorption costing centers on:
whether variable manufacturing costs should be included as product costs.
whether fixed manufacturing costs should be included as product costs.
whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.
none of these.
11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?
3,300 hot dogs
3,000 hot dogs
2,727.27 hot dogs
2,728 hot dogs
12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:
| Unit product cost under variable costing.......................... | $5.20 per unit | |
| Fixed manufacturing overhead cost for the year.............. | $260,000 | |
| Fixed selling and administrative cost for the year............ | $180,000 | |
| Units (calculators) produced and sold.............................. | 400,000 |
What is Shun's unit product cost under absorption costing for last year?
$4.10
$4.55
$5.85
$6.30.
Use the following information to answer questions 13 to 15:
Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.
13) Calculate the number of equivalent units for materials.
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
14) Calculate the number of equivalent units for conversion?
10,000 units
12,000 units
14,000 units
15,000 units
18,000 units
15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:
| Materials | Conversion | ||
| Work in process 5/1....................... | $13,800 | $3,740 | |
| Costs added during May................ | $42,000 | $26,260 |
The total cost per equivalent unit for May was:
$5.02
$5.10
$5.12
$5.25
BW Manufacturing Company produced gas grills in three primarymodels (Grills A, B, and C). BW was a small player in the industry,but business had been good, and it was expecting another profitableyear. Draft of the companyâs operating budget is shown in Exhibit1. Stand costs for the three products are explained in Exhibit 3.Selling, general, and administrative (SG&A), other costs,interest income, and interest expense were likely to remain thesame no matter which product-line combinations the companyproduced.
Before calling it a day, the two owners asked their assistant,Justine Richardson, to determine the impact of several options onincome before tax. They agreed to meet the following day, andRichardson hurried off to look at what these latest ideas wouldmean. She had four questions to address and was asked to considereach option independent of all other options.
BW Manufacturing Company
1.Calculate the impact of dropping Grill A. Assume no otherchanges to the plan.
Should BW drop Grill A? The owners wanted to know the impact ofdropping Grill A from their line of products. Richardson was toldto assume that the volumes and selling prices of the other twoproducts would be the same whether or not the Grill A product linewas dropped.
Your response:
2.Calculate the impact of reducing Grill C price to $75, withthe expectation that the volume of that product will increase to220,000 units. Assume no other changes to the plan.
Your response:
3. Calculate the impact of a 10,000 unit decrease in Grill A and10,000 unit increase in Grill C volume due to the change in theadvertising focus. Assume no other changes to the plan.
Should BW change its advertising focus?
Your response:
4. Calculate the impact of a $5 decrease in Grill Câs price anda change in advertising focus leading to a 10,000 unit decrease inGrill Aâs volume and a 30,000 unit increase in Grill Câs volume.Assume no other changes to the plan.
Should BW lower the price of Grill C and change its advertisingfocus?
Your response:
| Table 1. Actual2009 volumes | |||||||||
| Grill | Volume (# in units) | ||||||||
| A | 115,000 | ||||||||
| B | 110,000 | ||||||||
| C | 225,000 | ||||||||
| Richardson began to wonder ifthe bottom line was as high as it should have been | |||||||||
| Exhibit 1 | |||||||||
| BW Manufacturing Company | |||||||||
| Operating Budget 2009: Draft12/18/2008 | |||||||||
| Sales | $41,200,000 | ||||||||
| Less: costs of products sold | $22,800,000 | ||||||||
| Gross margin | $18,400,000 | ||||||||
| SG&A | $9,350,000 | ||||||||
| Other costs | $2,100,000 | ||||||||
| Operating income | $6,950,000 | ||||||||
| Less: Interest expense | $420,000 | ||||||||
| Plus: Interest income | $150,000 | ||||||||
| Income before tax | $6,680,000 | ||||||||
| Income taxes | $2,338,000 | ||||||||
| Net income | $4,342,000 | ||||||||
| Exhibit 2 | |||||||||
| Standard Costs | |||||||||
| Grill A | Grill B | Grill C | |||||||
| Planned Volume (units) | 80,000 | 120,000 | 200,000 | ||||||
| Per Unit: | |||||||||
| Sales price | $150 | $110 | $80 | ||||||
| Direct Costs: | |||||||||
| Materials | 17 | 10 | 7 | directly related to production volume | |||||
| Labor | 21 | 16 | 4 | directly related to production volume | |||||
| Subtotal | $38 | $26 | $11 | ||||||
| Indirect costs: | |||||||||
| Supplies | 7 | 2 | 1 | directly related to production volume | |||||
| Labor | 10 | 8 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Supervision | 8 | 3 | 1 | unrelated to production volume | |||||
| Energy | 12 | 6 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Depreciation | 22 | 7 | 5 | unrelated to production volume | |||||
| Head office support | 12 | 6 | 3 | corporate office allocation* | |||||
| All other | 11 | 2 | 1 | unrelated to production volume | |||||
| Subtotal | $82 | $34 | $19 | ||||||
| Total product cost | $120 | $60 | $30 | ||||||
| Product-line profitability | $30 | $50 | $50 | ||||||
| *This category comprisesaccounting, IT, human resources, legal, and other supporting theproduction of these products. | |||||||||
| Allocations were made usingmultiple drivers. Corporate office budgets are unrelated toproduction levels. | |||||||||
| Exhibit 3 | |||||||||
| 2009 Operating Results: Draft1/19/2010 | |||||||||
| Revenue | $46,225,000 | ||||||||
| Variable costs: | |||||||||
| Materials | 4,800,000 | ||||||||
| Direct labor | 5,200,000 | ||||||||
| Supplies | 1,300,000 | ||||||||
| Indirect labor | 1,500,000 | ||||||||
| Energy | 1,600,000 | ||||||||
| Total variable cost | $14,400,000 | ||||||||
| Fixed costs: | |||||||||
| Indirect labor | 1,300,000 | ||||||||
| Supervision | 1,200,000 | ||||||||
| Energy | 1,350,000 | ||||||||
| Depreciation | 3,660,000 | ||||||||
| Head office | 2,300,000 | ||||||||
| All other | 1,380,000 | ||||||||
| Total fixed cost | $11,190,000 | ||||||||
| Total cost | $25,590,000 | ||||||||
| Gross margin | $20,635,000 | ||||||||
| SG&A | 9,350,000 | ||||||||
| Other costs | 2,100,000 | ||||||||
| Operating income | $9,185,000 | ||||||||
| Less: interest expense | 420,000 | ||||||||
| Plus: interest income | 150,000 | ||||||||
| Income before tax | $8,915,000 | ||||||||
| Income taxes | $3,120,250 | ||||||||
| Net income | $5,794,750 | ||||||||
