ACCT 2102 Chapter Notes - Chapter 3: Matching Principle, Income Statement, Variable Cost

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2 May 2016

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Chapter 3- cost terminology & cost flows in financial acct systems: gaap distinguishes between product costs and period costs, requires matching of product costs to revenue: Product costs: costs related to getting products or services ready for sale (e. g. , materials and labor used in production, depreciation of production equipment, rent on factory building) (expense when sold) Period costs: all costs that are not product costs (e. g. , sales office rent, advertising, customer service costs, sales force compensation, ceo salary) (expense when incurred: matching principle in gaap: Product costs on the income statement are matched to sales revenue (i. e. , expensed when the product is sold, not when the cost was incurred) Period costs are expensed in the period in which they were incurred (not flown through inventory accounts) Example: buy 10 cars on january 1st for ,000 each. Also spend ,000 a month on rent and staff salaries. Cost of cars is a product cost (expense when sold)

Related Questions

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

pearbat350

Ohno Company specializes in manufacturing a unique model of bicycle helmet. The model is well accepted by consumers, and the company has enough orders to keep the factory production at 10,000 helmets per month (80% of its full capacity). Ohno's monthly manufacturing cost and other expense data are as follows. Rent on factory equipment $11,000 Insurance on factory building 1,500 Raw materials (plastics, polystyrene, etc.) 75,000 Utility costs for factory 900 Supplies for general office 300 Wages for assembly line workers 58,000 Depreciation on office equipment 800 Miscellaneous materials (glue, thread, etc.) 1,100 Factory manager's salary 5,700 Property taxes on factory building 400 Advertising for helmets 14,000 Sales commissions 10,000 Depreciation on factory building 1,500 Margin check figures provide key numbers to confirm that you are on the right track. Instructions (a) Prepare an answer sheet with the following column headings. Product Costs Cost Item Direct Materials Direct Labor Manufacturing Overhead Period Costs Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. Total the dollar amounts in each of the columns. DM $75,000 DL $58,000 MO $22,100 PC $25,100 (b) Compute the cost to produce one helmet. P1-2A Classify manufacturing costs into different categories and compute the unit cost. (LO 2), AP Bell Company, a manufacturer of audio systems, started its production in October 2017. For the preceding 3 years, Bell had been a retailer of audio systems. After a thorough survey of audio system markets, Bell decided to turn its retail store into an audio equipment factory. Raw materials cost for an audio system will total $74 per unit. Workers on the production lines are on average paid $12 per hour. An audio system usually takes 5 hours to complete. In addition, the rent on the equipment used to assemble audio systems amounts to $4,900 per month. Indirect materials cost $5 per system. A supervisor was hired to oversee production; her monthly salary is $3,000. Factory janitorial costs are $1,300 monthly. Advertising costs for the audio system will be $9,500 per month. The factory building depreciation expense is $7,800 per year. Property taxes on the factory building will be $9,000 per year. Instructions (a) Prepare an answer sheet with the following column headings. Product Costs Cost Item Direct Materials Direct Labor Manufacturing Overhead Period Costs Assuming that Bell manufactures, on average, 1,500 audio systems per month, enter each cost item on your answer sheet, placing the dollar amount per month under the appropriate headings. Total the dollar amounts in each of the columns. DM $111,00 DL $ 90,000 MO $ 18,100 PC $ 9,500 (b) Compute the cost to produce one audio system.

coffeetermite413

Flexible Budget for Selling and Administrative Expenses for aService Company

Morningside Technologies Inc. uses flexible budgets that arebased on the following data:

Sales commissions	7% of sales
Advertising expense	25% of sales
Miscellaneous administrative expense	$1,850 per month plus 3% of sales
Office salaries expense	$17,000 per month
Customer support expenses	$2,600 plus 4% of sales
Research and development expense	5,750 per month

Prepare a flexible selling and administrative expenses budgetfor April for sales volumes of $115,000, $145,000, and $175,000.Enter all amounts as positive numbers.

Morningside Technologies Inc.
Flexible Selling and Administrative ExpensesBudget
Forthe Month Ending April 30
Total sales	$115,000	$145,000	$175,000
Variable cost:
Sales commissions	$	$	$
Advertising expense
Miscellaneousadministrative expense
Customer support expense
Total variable cost	$	$	$
Fixed cost:
Miscellaneous administrative expense	$	$	$
Office salaries expense
Customer support expense
Research and development expense
Total fixed cost	$	$	$
Total selling and administrativeexpenses	$	$	$

Sales and Production Budgets

Sonic Inc. manufactures two models of speakers, Rumble andThunder. Based on the following production and sales data for June,prepare (a) a sales budget and (b) a production budget.

	Rumble	Thunder
Estimated inventory (units), June 1	278	77
Desired inventory (units), June 30	319	67
Expected sales volume (units):
East Region	4,100	4,600
West Region	5,000	4,350
Unit sales price	$115	$185

a. Prepare a sales budget.

SonicInc.
SalesBudget
Forthe Month Ending June 30
Product and Area	Unit Sales Volume	Unit Selling Price	Total Sales
Model Rumble:
East Region		$	$
West Region
Total			$
Model Thunder:
East Region		$	$
West Region
Total			$
Total revenue from sales			$

Cash Budget

The controller of Sonoma Housewares Inc. instructs you toprepare a monthly cash budget for the next three months. You arepresented with the following budget information:

	May	June	July
Sales	$90,000	$111,000	$142,000
Manufacturing costs	38,000	48,000	51,000
Selling and administrative expenses	26,000	30,000	31,000
Capital expenditures	_	_	34,000

The company expects to sell about 10% of its merchandise forcash. Of sales on account, 60% are expected to be collected in themonth following the sale and the remainder the following month(second month following sale). Depreciation, insurance, andproperty tax expense represent $9,000 of the estimated monthlymanufacturing costs. The annual insurance premium is paid inSeptember, and the annual property taxes are paid in November. Ofthe remainder of the manufacturing costs, 75% are expected to bepaid in the month in which they are incurred and the balance in thefollowing month.

Current assets as of May 1 include cash of $34,000, marketablesecurities of $49,000, and accounts receivable of $107,800 ($79,000from April sales and $28,800 from March sales). Sales on accountfor March and April were $72,000 and $79,000, respectively. Currentliabilities as of May 1 include $10,000 of accounts payableincurred in April for manufacturing costs. All selling andadministrative expenses are paid in cash in the period they areincurred. An estimated income tax payment of $13,000 will be madein June. Sonomaâs regular quarterly dividend of $9,000 is expectedto be declared in June and paid in July. Management wants tomaintain a minimum cash balance of $27,000.

Required:

1. Prepare a monthly cash budget and supportingschedules for May, June, and July. Input all amounts as positivevalues except overall cash decrease and deficiency which should beindicated with a minus sign.

Sonoma Housewares Inc.
CashBudget
Forthe Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments	$	$	$
Cash increase or (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess or (deficiency)	$	$	$

Factory Overhead Cost Budget

Sweet Tooth Company budgeted the following costs for anticipatedproduction for August:

Advertising expenses	$259,400
Manufacturing supplies	14,220
Power and light	42,400
Sales commissions	290,020
Factory insurance	24,690
Production supervisor wages	124,710
Production control wages	32,420
Executive officer salaries	264,390
Materials management wages	35,670
Factory depreciation	20,210

Prepare a factory overhead cost budget, separating variable andfixed costs. Assume that factory insurance and depreciation are theonly fixed factory costs.

SweetTooth Company
Factory Overhead Cost Budget
Forthe Month Ending August 31
Variable factory overhead costs:
Manufacturingsupplies	$
Power and light
Production supervisorwages
Production controlwages
Materials managementwages
Total variable factory overhead costs		$
Fixed factory overhead costs:
Factory insurance	$
Factory depreciation
Total fixed factory overhead costs
Total factory overhead costs		$

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ACCT 2102 Chapter Notes - Chapter 3: Matching Principle, Income Statement, Variable Cost

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