ACC 132 Study Guide - Quiz Guide: Sunk Costs, Gross Margin, Income Statement

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violettiger345

6 Nov 2018

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*know some basic differences between managerial and financial accounting. *know all cost terms, definitions, and application covered see the glossary for a comprehensive list. *know behavior of fixed and variable costs in total and on a per unit basis and give examples. We spent a lot of time on these. *be able to define and give examples of product costs (factory) and period costs (non-factory) *be able to identify a company"s various expenses as variable, fixed, and mixed same as above. *be familiar with both the traditional and contribution income statements. *be able to calculate gross margin (traditional income statement) and contribution margin (contribution income statement) *differential costs, opportunity costs, sunk costs, prime costs, conversion costs, activity base. *be able to prepare a schedule of cost of goods manufactured and a schedule of cost of. *be able to prepare journal entries beginning with acquiring raw materials through the sale of finished goods and posting into their t-accounts.

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9.27 Direct cost and overhead variances; decision to automatePlush pet toys are produced in a largely automated factory instandard lots of 100 toys each. A standard cost system is used tocontrol costs and to assign cost to inventory. Price standardQuantity standard Plus fabric $2 per metre 15 metres per lot Directlabour $10 per hour 2 hours per lot Variable overhead, estimated at$5 per lot, consists of miscellaneous items such as thread, avariety of plastic squeakers, and paints that are applied to createfeatures such as eyes and whiskers. Fixed overhead, estimated at$24 000 per month, consists largely of depreciation on theautomated machinery and rent for the building. Variable overhead isallocated based on lots produced. The standard fixed overheadallocation rate is based on the estimated output of 1000 lots permonth. Actual data for last month follow. Production 2,400 lotsSales 1,600 lots Plus fabric purchased 30,000 metres Cost of fabricpurchased $62,000 Fabric used 34,000 metres Direct labour 4,200hours Direct labour cost $39,000 Variable overhead $12,000 Fixedoverhead $24,920 The entityâs policy is to record materials pricevariances at the time materials are purchased. Required (a)Calculate the commonly used direct cost and overhead variances. (b)Management is considering further automation in the factory.Robot-controlled forklifts could reduce the standard direct labourper lot to 1.5 hours. (i) Estimate the savings per lot that wouldbe realised from this additional automation. (ii) Assume thecompany would be able to generate the savings as calculated.Considering only quantitative factors, calculate the maximum pricethe managers would be willing to pay for the robot-controlledforklifts. Assume the companyâs management requires equipment coststo be recovered in five years, ignoring the time value of money.15.16 Big Bertram uses the just-in-time method to manufacture golfclubs. The manufacturing schedule for the clubs is developed ascustomers place orders. Each club is made within a cell where fiveworkers have production stations. The raw materials are deliveredto the cell as needed. Each worker in the cell performs one step inthe manufacturing process and then inspects the club before givingit to the next person. When a club is finished, it is set on afinished goods rack, which is sent to the packaging department atregular intervals. Required (a) What do we call a manufacturingsystem such as the one used by Big Bertram? (b) Describe generaladvantages of this type of system. (c) The supplier thatmanufactures the weights that are inserted in each club head wouldlike to monitor Big Bertramâs inventory levels through the internetso that its new software program could release deliveries atappropriate times. List qualitative factors that might affect BigBertramâs decision about this proposal.

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Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel.

Data for all questions: Tamâs Tables produces wooden kitchen and dining room tables. Their tables are sold at many local furniture stores. The cost of manufacturing and marketing their tables, at their normal factory volume of 2,000 tables per month, is shown in the table below. These tables sell for $700 each. Tamâs Tables is making a small profit, but would prefer to increase profitability.

(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)

	Per Unit	Per Unit
Unit Manufacturing Costs:
Variable Materials	$ 175.00
Variable Labor	$ 125.00
Variable Overhead	$ 50.00
Fixed Overhead	$ 150.00
Total Unit Manufacturing Costs:		$ 500.00

Unit Marketing Costs:
Variable Marketing Costs	$ 75.00
Fixed Marketing Costs	$ 100.00
Total Unit Marketing Costs:		$ 175.00

Question 1: What is the break-even point? A) In units? B) In sales dollars?

Question 2: A large furniture chain has offered to purchase 2,000 tables (one time for their family dinner advertising campaign) if the sales price was lowered to $575 per table. Tamâs Tablesâ maximum capacity is 3,000 units. A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Tamâs Tables accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Tamâs Tables should accept this sale? Support your decision with evidence and analysis.

Question 3: Some of the furniture stores have been asking for granite-topped tables. Tamâs Tables would be able to produce a granite-topped table with their wooden frame and legs on their existing assembly line if they purchased a new machine to shape the granite top. This would increase fixed overhead costs by $150,000 per month (still based on normal production volume of 2,000 units). The variable materials costs for the granite tables would also be double the cost of the variable materials for the granite tables (the granite is more expensive than the wood). Maximum production for both types of tables together would still be 3,000 units because the same assembly line would be used. The granite tables would sell for $1,000 each. A) What would be the break-even point if Tamâs Tables only sold granite tables? (In units and sales dollars) B) Create a contribution income statement for a month in which Tamâs Tables sold 1,000 wooden tables, and 1,500 granite tables. C) Explain, in your own words, how the changes to fixed and variable costs for the granite tables impact profitability.

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As you know, we have been renting Building X for several yearsto the Smith Company for $30,000 per year. Their lease expires atthe end of the year. Instead of renewing the lease, I have beenthinking that we should use that part of our plant to manufacture anew product. The direct materials cost for the new product willtotal $80 per unit. To have a place to store finished units of theproduct, we will rent a small warehouse nearby. The rental costwill be $500 per month. In addition, we must rent equipment for usein producing the new product; the rental cost will be $4,000 permonth. We will hire workers to manufacture the new product, withthe direct labor cost amounting to $60 per unit. The space inBuilding X will continue to be depreciated on a straight-linebasis, as in prior years. This depreciation is $8,000 per year.Advertising costs for the new product will total $50,000 per year.I am going to hire a supervisor to oversee production; her salarywill be $3,500 per month. Electricity for operating the machineswill be $1 per unit. The cost of shipping the new product tocustomers will be $9 per unit. To provide funds to purchasematerials, meet payroll, and so forth, we will have to liquidatesome temporary investments. These investments are presentlyyielding a return of about $3,000 per year. I would like to sellthe new product for $200 per unit. The marketing department thinksthat at that price we should be able to sell 4,000 units everyyear. Please review the costs below and let me know if you thinkthe costs should be classified as a product cost, a period cost, oran opportunity cost (pick one). I also would like to know if thebehavior of the product cost or period cost is fixed or variable.Opportunity costs should not be classified as fixed or variable.(Hint: There are two opportunity costs in this problem. They arethe two items that are ârevenueâ in the list of costs.) Name ofCost Variable or Fixed Cost Product Cost Period Cost OpportunityCost Rental revenue (from Smith Co.) forgone, $30,000 per yearDirect materials cost, $80 per unit Rental cost of warehouse, $500per month Rental cost of equipment, $4,000 per month Direct laborcost, $60 per unit Depreciation of Building X, $8,000 per yearAdvertising cost, $50,000 per year Supervisorâs salary, $3,500 permonth Electricity for machines, $1 per unit Shipping cost, $9 perunit Revenue earned on investments, $3,000 per year Based on theinformation above, do you think we should manufacture the newproduct or should we continue to rent to Smith Company? In thespace below and on the next pages, please provide me with numbersto support your answer. Are there any costs that are not relevantin this decision? How many units do we need to sell in order toâbreak even?â Option 1: Continue to rent to Smith Company Rentalrevenue from Smith _______________ Investment revenue_______________ Total revenue _______________ Expenses:________________________ _______________ Net operating income_______________ Option 2: Manufacture the new product Henry HawkinsIndustries Contribution Format Income Statement: New Product Forthe Year Total Per Unit Sales (4,000 units) $800,000 $200 Variableexpenses: _____________________ _______________ ___________________________ _______________ ______ ____________________________________ ______ _____________________ _______________ ______Total variable expenses _______________ ______ Contribution margin_______________ ______ Fixed expenses: ____________________________________ _____________________ ____________________________________ _______________ ____________________________________ _____________________ _______________ Total fixedexpenses _______________ Net operating income _______________Questions: 1. Do you recommend Option 1 or Option 2? 2. Which costis not relevant to the decision? (Hint: which cost shows up in bothoptions.) 3. How many units of the new product do we need to sellin order to âbreak-even?â (Break-even is where the net operatingincome is zero.)

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ACC 132 Study Guide - Quiz Guide: Sunk Costs, Gross Margin, Income Statement

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