ACCTG 2600 Lecture Notes - Lecture 2: Fixed Cost, Income Statement, Direct Labor 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
Mario's Foods produces frozen meals, which it sells for $9 each.The company uses the FIFO invenotry costing method, and it computesa new monthy fixed manufactoring overhead rate based on the actualnumber of meals produced that month. All cost and production levelsare exactly as planned. The following data are from the company'sfirst two months in business:
| JAN | FEB | |
| Sales........................ | 1,600 meals | 1,900 meals |
| Production............... | 2,000 meals | 1,600 meals |
| Variable manufactoring expense per meal | $5 | $5 |
| Sales commision expense per meal | $2 | $2 |
| Total fixed manfucuring overhead | $800 | $800 |
| Total fixed makerting and administrative expenses | $700 | $700 |
Requirements:
1. Compute the product cost per meal produced underabsorptioncosting and under variable costing. Do this first for January, andthen for Febuary.
2. Prepare seperate monthly income statements for January andfor February, using the following:
a. Absorrption costing
b. Variable Costing
3. Is operating income higher under absorption costing orvariable costing in January? In February? Explain the pattern ofdifferences in operating income based on absorption costing versusvariable costing.
Requirement 1. Compute the product cost permeal under absortion costing and under variable costing. Do thisfirst for January and the Febuary
| JAN | FEB | |||
| Absorbtion Costing | Variable Costing | Absorption Costing | Variable Costing | |
| Total Product cost |
Requirement 2a. Prepare seperate monthly incomestatements for January and for Feb, using absorption costing
Mario's Foods o
Contribution Margin Income Statement (variablecosting)
Month Ended
| Jan 31 | Feb 31 | ||
| Less | |||
Requirement 2b. Prepare Marios Foods Jan and Feb incomeStatement using variable costing
Requirement 3. Is operating income higher under absorptioncosting or variable costing in Jan? In Feb? Explain the pattern ofdifferences in operating income based on absorption costing versusvariable costing.
In Jan, absorption costing operating income_____(equals,exceedsor less than) variable costing income. This is because unitsproduced ______(equal to, greater than, less than) units weresold.
Absorption costing some of _____(Jan or Feb) __________(fixedmanufacturing overhead, nonmaufactoring, variable maufactoringoverhead) costs in the units of ending inventory. These cost willnot be_____(capitalized, expensed, paid in for cash) until thoseare sold. Deferring these _________ ( fixed manufactoring overhead,nonmanufactoring, variable manufactoring overhead)cost to thefuture _______ (Increases, Decreases)January's absoprtion costingincome.
In Feb, absorption costing operating income ________ (equals,exceeds, less than) variable costing operating income. This isbecause units produced were _____ (equal to, greather than, lessthan)units sold for the month.
As inventory______(increases, declines) as was the case in thisFebruary, January's ________(fixed manufactoring overhead,nonmanufactoring, variable manufactoring overhead) costs thatabsorption costing assigned to that inventory are expensed in_______(Jan, Feb). This _______ ( increases, decreases)Febuary'sabsorption costing income.
