ACCT 001 Lecture Notes - Lecture 24: Variable Cost, Income Statement, Cost Driver
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1. ABC generally causes the least amount of cost distortionamong products because indirect costs are allocated to the productsbased on
| types of activities used by theproduct. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| the extent to which the activitiesare used. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| both A and B. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| none of the above. 2. Chicago Steel's operating activities for the year are listedbelow:
What is the cost of goods sold for the year?
|
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
TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompanyâs products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,500 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 3,125 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums: |
| WVD Drums | |||
| Selling price perdrum | $ | 169.00 | |
| Cost per drum: | |||
| Directmaterials | $46.20 | ||
| Directlabor ($18 per hour) | 4.50 | ||
| Manufacturing overhead | 4.85 | ||
| Sellingand administrative expense | 17.10 | 72.65 | |
| Margin per drum | $ | 96.35 | |
Management believes 3,625 WVD drums could besold each year if the company had sufficient manufacturingcapacity. As an alternative to adding another welding machine,management has considered buying additional drums from an outsidesupplier. Harcor Industries, Inc., a supplier of quality products,would be able to provide up to 2,000 WVD-type drums per year at aprice of $130 per drum, which TufStuff would resell to itscustomers at its normal selling price after appropriaterelabeling. |
Megan Flores, TufStuffâs production manager,has suggested that the company could make better use of the weldingmachine by manufacturing bike frames, which would require only 0.2hours of welding machine time per frame and yet sell for far morethan the drums. Megan believes that TufStuff could sell up to 3,500bike frames per year to bike manufacturers at a price of $75 each.The accounting department has provided the following dataconcerning the proposed new product: |
| Bike Frames | |||
| Selling price perframe | $ | 75.00 | |
| Cost per frame: | |||
| Directmaterials | $19.20 | ||
| Directlabor ($18 per hour) | 22.50 | ||
| Manufacturing overhead | 17.45 | ||
| Sellingand administrative expense | 8.20 | 67.35 | |
| Margin perframe | $ | 7.65 | |
The bike frames could be produced withexisting equipment and personnel. Manufacturing overhead isallocated to products on the basis of direct labor-hours. Most ofthe manufacturing overhead consists of fixed common costs such asrent on the factory building, but some of it is variable. Thevariable manufacturing overhead has been estimated at $1.22 per WVDdrum and $2.30 per bike frame. The variable manufacturing overheadcost would not be incurred on drums acquired from the outsidesupplier. |
Selling and administrative expenses areallocated to products on the basis of revenues. Almost all of theselling and administrative expenses are fixed common costs, but ithas been estimated that variable selling and administrativeexpenses amount to $1.02 per WVD drum whether made or purchased andwould be $2.10 per bike frame. |
| All of the companyâs employeesâdirect andindirectâare paid for full 40-hour workweeks and the company has apolicy of laying off workers only in major recessions.
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