MGAB03H3 Lecture Notes - Lecture 3: Icq, Variable Cost, Fixed Cost
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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
Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many GlacierHotel
Using the High-Low Method to Estimate Variable and FixedCosts
Located on Swiftcurrent Lake in Glacier National Park, ManyGlacier Hotel was built in 1915 by the Great Northern Railway. Inan effort to supplement its lodging revenue, the hotel decided in20X1 to begin manufacturing and selling small wooden canoesdecorated with symbols hand painted by Native Americans living nearthe park. Due to the great success of the canoes, the hotel beganmanufacturing and selling paddles as well in 20X3. Many hotelguests purchase a canoe and paddles for use in self-guided tours ofSwiftcurrent Lake. Because production of the two products began indifferent years, the canoes and paddles are produced in separateproduction facilities and employ different laborers. Each canoesells for $500, and each paddle sells for $50. A 20X3 firedestroyed the hotelâs accounting records. However, a new system putinto place before the 20X4 season provides the following aggregateddata for the hotelâs canoe and paddle manufacturing and marketingactivities:
| Manufacturing Data: | ||||||||||||||
| Year | Number of Canoes Manufactured | Total Canoe Manufacturing Costs | Year | Number of Paddles Manufactured | Total Paddle Manufacturing Costs | |||||||||
| 20X9 | 250 | $103,000 | 20X9 | 900 | $38,500 | |||||||||
| 20X8 | 275 | 128,000 | 20X8 | 1,200 | 49,000 | |||||||||
| 20X7 | 240 | 108,000 | 20X7 | 1,000 | 44,000 | |||||||||
| 20X6 | 310 | 114,000 | 20X6 | 1,100 | 45,500 | |||||||||
| 20X5 | 350 | 141,500 | 20X5 | 1,400 | 52,000 | |||||||||
| 20X4 | 400 | 140,000 | 20X4 | 1,700 | 66,500 | |||||||||
| Marketing Data: | ||||||||||||||
| Year | Number of Canoes Sold | Total Canoe Marketing Costs | Year | Number of Paddles Sold | Total Paddle Marketing Costs | |||||||||
| 20X9 | 250 | $45,000 | 20X9 | 900 | $7,500 | |||||||||
| 20X8 | 275 | 43,000 | 20X8 | 1,200 | 9,000 | |||||||||
| 20X7 | 240 | 44,000 | 20X7 | 1,000 | 8,000 | |||||||||
| 20X6 | 310 | 51,000 | 20X6 | 1,100 | 8,500 | |||||||||
| 20X5 | 350 | 62,000 | 20X5 | 1,400 | 10,000 | |||||||||
| 20X4 | 400 | 60,000 | 20X4 | 1,700 | 11,500 | |||||||||
Required:
1. High-Low Cost Estimation Method
a. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the canoe productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
b. Use the high-low method to estimate the per-unit variablecosts and total fixed costs for the paddle productline.
| Variable cost per unit | $ |
| Total fixed cost | $ |
2. Cost-Volume-Profit Analysis, Single-ProductSetting
Use CVP analysis to calculate the break-even point in units for
a. The canoe product line only (i.e.,single-product setting)
| BE units | canoes |
b. The paddle product line only (i.e.,single-product setting)
| BE units | paddles |
3. Cost-Volume-Profit Analysis,Multiple-Product Setting
The hotel's accounting system data show an average sales mix ofapproximately 300 canoes and 1,200 paddles each season.Significantly more paddles are sold relative to canoes because someinexperienced canoe guests accidentally break one or more paddles,while other guests purchase additional paddles as presents forfriends and relatives. In addition, for this multiple-product CVPanalysis, assume the existence of an additional $30,000 of commonfixed costs for a customer service hotline used for both canoe andpaddle customers. Use CVP analysis to calculate the break-evenpoint in units for both the canoe and paddle product lines combined(i.e., the multiple-product setting).
| Canoe BE units | canoes |
| Paddle BE units | paddles |
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, andcustomer service hotline costs either as production costs or periodcosts.
All manufacturing costs are costs. All marketing costs andcustomer hotline costs are costs
b. For the period costs, further classify them into eitherselling expenses or general and administrative expenses.
Marketing costs are selling oriented; therefore, the marketingperiod costs would be further classified as . Customer hotlinecosts relate to the customer service section of the value chain andwould be further classified as .
5. Sensitivity Cost-Volume-Profit Analysis andProduction Versus Period Costs, Multiple- Product Setting
If both the variable and fixed production costs (refer to youranswer to Requirement 1) associated with the canoe product lineincreased by 5% (beyond the estimate from the high-low analysis),how many canoes and paddles would need to be sold in order to earna target income of $96,000? Assume the same sales mix andadditional fixed costs as in Requirement 3.
| Canoe target income units | canoes |
| Paddle target income units | paddles |
6. Margin of Safety
Calculate the hotelâs margin of safety (both in units and insales dollars) for Many Glacier Hotel, assuming the same facts asin Requirement 3, and assuming that it sells 700 canoes and 2,500paddles next year.
total MOS units above total BE units
$ MOS in sales dollars
***Please answer questions 13 and 14, thank you.
Your company produces a basic potato chip. There are three mainprocesses used in the chips. The first process washes and peels thepotatoes. The second process slices and fries the potatoes. Thethird process seasons and packages the chips. The potato chips aresold in 12 oz bags (1 bag is a unit)
Information on the direct materials is listed in table 1.Consider this information the standard.
Direct labor information given in Table 2. Consider thisinformation the standard.
Annual overhead information is given in Table 3. Overhead isallocated based direct labor hours. Estimated annual direct laborhours are 12,500. Calculate a predetermined OH rate (round to twodecimal places if needed). Use this rate when you need to applyOH.
Table 4 gives you the information for the last two months on theoverhead cost. Use this information to determine the fixed andvariable portions of the cost. (You will need this information tocomplete Table 5). Machine hours have been determined as the bestcost driver for separating mixed cost into their fixed and variableportions. It takes approximately 12 minutes of total machine timefor each bag of chips (or 1/5 a machine hour per bag of chips).
Table 5 is where you will list all your production cost,separated into their fixed and variable components.
Cost-Volume-Profit (CVP) Relationships
Selling Price: You sell a bag of chips for $5.14
Breakeven point: Calculate the breakeven point. Be sure toinclude the fixed component of mixed cost in your fixed costs andthe variable component in the variable cost.Show your breakeven in Sales units and in Sales Dollars
Profit Planning: Determine the number of units you must sell tomake an annual pre-tax profit using 3 assumptions concerning yournet income (profit), both in sales units and sales dollars.
Aggressive Profit ($100,000)
Conservative Profit ($25,000)
Average Profit ($60,425)
Budgeting:
Create a sales budget using the information for earning anaverage profit for the year. You will break the budget down intothe four quarters for the year. (Sales tend to be consistent eachquarter, you can only sale a whole unit so round-up if necessary)Use table 6 to complete the sales budget.
Create a production budget for each quarter of the year (keep itin quarters; you do not need to break it down by month). You desireto keep 10% of next quarterâs sales in ending inventory. Sales forQtr 1 the following year are expected to be 30,000 bags of chips.There is not any beginning finished goods inventory for quarterone. Use table 7 to complete the production budget.
Running quarter one -- Weighted-average process costing. Table 8presents the information for the packaging department. Complete thequestions under table 8.
Actuals are in for quarter one. You sold 25% more units than youbudgeted for, but price per unit was only $5.00.
Calculate revenue
Compute the cost of goods sold (total and per unit) beforeadjusting for actual OH cost
Actual potato usage for quarter one was 69,500 pounds at a priceof $0.54 per pound. Actual equivalent units of production (bags ofchips) completed through the first process (where the potatoes areadded) was 29,520. Calculate the direct materials variances for thepotatoes (price, usage, and total) and indicate if these variancesare favorable or unfavorable.
Actual direct labor hours for the quarter were 5,120 at anaverage rate of $12.05 per hour. For actual production you expectedto use 4,800 direct labor hours. Calculate the direct laborvariances (rate, efficiency and total) and indicate if thesevariances are favorable or unfavorable.
13) For next quarter you have been asked to supply a specialorder of you potato chips. The non-profit organization requestingthis order would like a special bag that will cost $0.28 instead ofthe normal $0.25 per bag. The request is for 10,000 bags of chips.Based on your projections you have the capacity for this order.What is the minimum price per unit and total price you would bewilling to accept on this order? (You cannot afford to take thisoffer at a loss, but you are fine with accepting it at cost).
14) Determine over- or under-applied overhead and close to costof goods sold. Actual OH cost are given in table 14 (look at #12for actual DL hours used to apply OH). Determine the new cost ofgoods sold amount.
Table 1: Direct Materials
Material | Quantity per unit | Cost | Total per unit |
potatoes | 1.5 lbs | $0.60 | $0.90 |
seasoning | 1 ounce | 0.05 | 0.05 |
packaging | 1 bag | 0.25 | 0.25 |
1/12 box | 0.6 | 0.05 | |
Total cost | $1.25 |
Table 2: Direct Labor
Job description | Hours per bag | Rate | Total cost |
Potato washer & peeler | 0.1 | $11.50 | $1.15 |
Slicer & Fryer | 0.04 | 11.50 | 0.46 |
Packager | 0.06 | 11.50 | 0.69 |
Total cost | $2.30 |
Table 3: YEARLY OVERHEAD COSTS
Cost description | Amount |
Indirect material | $6,500 |
Indirect labor | 61,450 |
Machine Maintenance | 4,120 |
Electricity | 3,570 |
Depreciation | 6,340 |
Quality testing | 10,520 |
Total | 92,500 |
Predetermined OH rate:
Table 4 â Actual Overhead cost for the last two months
Month 1 | Month 2 | |
Indirect Material (F) | $530 | $530 |
Indirect Labor (F) | 5,250 | 5,250 |
Machine Maintenance | 370 | 445 |
Electricity | 180 | 225 |
Depreciation (F) | 625 | 625 |
Quality testing | 510 | 600 |
Machine Hours * | 1,200 | 1,500 |
*12 minutes of machine time per bag of chips (1/5 hour = 1unit)
Complete any calculations here:
Table 5: Variable and Fixed Costs
COSTS Description VARIABLE Cost perunit FIXED Cost perYear
TOTAL |
If a cost is mixed, put the fixed amount in the fixed column andthe variable amount in the variable column.
CVP Calculations:
Table 6 â Sales Budget
Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
Table 7 â Production Budget
Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | |
Process Costing â Packaging Department
Direct materials are added 70% at the beginning of the processand the remaining 30% are added when the chips are 50% completewith the packaging process. Direct labor and overhead are addedevenly throughout the process.
Table 8 â Unit and cost information
Cost | |||||
Physical Units | Transferred-in | Direct Materials | Direct Labor | Overhead | |
Beg WIP | 1,000 (40% complete) | $6,500 | $112.40 | $1,948.85 | $1,788.35 |
Transferred In | 30,000 | $63,250 | |||
End WIP | 2,200 (30% complete) | ||||
Added during Qtr 1:
Direct Materials -- $5045.40
Direct Labor â 1,580 hrs @ $12.05 per hour
Overhead â OH is applied based on predetermined OH rate andactual DL hours
1. Determine the number of unitscompleted during quarter 1.
2. Compute the equivalent units usingthe weighted average method
3. Compute the cost per equivalentunit using the weighted average method
4. Compute the cost of goodstransferred to finished goods inventory
5. Compute the ending balance in WIP,Packaging
Table 10 â Actual Results (calculaterevenue and COGS)
Units sold | Sales Price | Revenue |
Units sold | Cost per unit | COGS |
Table 11 â DM Variances (potatoesonly)
Price Variance | |
Usage Variance | |
Total Variance |
Calculations:
Table 12 â Direct Labor Variances
Rate Variance | |
Efficiency Variance | |
Total Variance |
Calculations:
#13 Calculations (Minimum price onspecial order)
Table 14 â Actual OH cost for Quarter1
Description | Cost |
Indirect Materials | $2,190 |
Indirect Labor | $18,250 |
Machine Maintenance | $1,825 |
Electricity | $1,720 |
Depreciation | $1,585 |
Quality Testing | $5,940 |
Amount of applied OH:
Amount of actual OH:
Under or Over- Applied Amount:
New COGS amount:
