ACCT 2101 : ACCT 2101 Test 1 Study Guide

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azuremammoth471

15 Mar 2019

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Definitions will be asked in the form of all the following are true except so you must know the definition in detail such as activity based costing. The wiley plus online workout are much harder than what"s actually on the test. Know your equations for cogs and cogm as well as work in process and contribution margin. Each of the manufacturing cost components direct materials, direct labor, and manufacturing overhead are product costs. As the term suggests, product costs are costs that are a necessary and integral part of producing the finished product. Companies record product costs, when incurred, as inventory. Under the matching principle, these costs do not become expenses until the company sells the finished goods inventory. At that point, the company records the expense as cost of goods sold. Period costs are costs that are matched with the revenue of a specific time period rather than included as part of the cost of a salable product.

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Variable Costing

An approach to measuring profitability that avoids the problemsinherent in making fixed overhead look like a variable cost isvariable costing. Variable costing (sometimes called directcosting) assigns only unit-level variable manufacturing costs tothe product; these costs include direct materials, direct labor,and variable overhead. Fixed overhead is treated as a period costand is not inventoried with the other product costs. Instead, it isexpensed in the period incurred.

The result of treating fixed manufacturing overhead as a periodexpense is to reduce the factory costs that are inventoriable.Under variable costing, only direct materials, direct labor, andvariable overhead are inventoried. (Remember that marketing andadministrative expenses are never inventoried-whether variable orfixed.)

Example: Fender Company showed the followingunit costs for its product:


Direct materials	$1.15
Direct labor	0.60
Variable overhead	0.22
Fixed overhead*	2.44
*Based on capacity of 29,800units.

Last year, Fender made 29,800 units and sold 27,700 units at aprice of $9.01. Selling and administrative expense equaled $49,170(all fixed). Beginning Finished Goods Inventory contained 410 unitswith cost of $1,808.10.

Cost of one unit under variablecosting	= Direct materials + Direct labor +Variable overhead
	= $1.15 + $0.60 + $0.22 =$1.97

Units in ending Finished GoodsInventory	= 410 + 29,800 - 27,700 = 2,510units

Ending Finished GoodsInventory	= 2,510 Ã $1.97 = $4,944.70

The income statement for Fender Company is as follows:


Sales		$249,577
Variable cost of Goods Sold ($1.97Ã 27,700)		54,569
Contribution margin		$195,008
Less:
Fixed overhead	72,712
Selling andadministrative expense	49,170	121,882
Variable-costing operatingincome		$73,126

Notice that all of the fixed factory overhead of $72,712 ($2.44Ã 29,800) and the variable cost of manufacturing for the units sold($1.97 Ã 27,700 units sold) appear on the variable-costing incomestatement. None of the fixed factory overhead is attached to unsoldunits added to Finished Goods inventory because the fixed overheadis treated as a period expense. Only the variable cost ofmanufacturing ($1.97 Ã 2,100) is added to Finished Goods inventory- attached to the 2,100 units that were produced but not sold.

1.	Under variable costing, ifbeginning Finished Goods Inventory equaled zero, the value ofending Finished Goods Inventory would be $?? .

2.	Ignoring question 1 above,if Fender Company sold 30,020 units, there wouldbe units in ending Finished Goods Inventory with a valueof $?? (round to the nearest cent).

Reconciling the Difference Between Absorption andVariable Costing

When inventories change from the beginning to the end of theperiod, the two costing approaches will give different operatingincomes. The reason for this is that absorption costing assignsfixed manufacturing overhead to units produced. If those units aresold, the fixed overhead appears on the income statement under costof goods sold. If the units are not sold, the fixed overhead goesinto inventory. Under variable costing, however, all fixed overheadfor the period is expensed. As a result, absorption costing allowsmanagers to manipulate operating income by producing for inventory.Let's compare the income statements under the two methods forFender Company.

Example: Fender Company showed the followingunit costs for its product:


Direct materials	$1.15
Direct labor	0.60
Variable overhead	0.22
Fixed overhead*	2.44
*Based on capacity of 29,800units.

Absorption-CostingIncome		Variable CostingIncome
Sales	$249,577.00	Sales	$249,577.00
COGS ($4.41 Ã 27,700)	122,157.00	Variable COGS ($1.97 Ã 27,700)	54,569.00
Gross margin	$127,420.00	Contribution margin	$195,008.00
Less:		Fixed overhead	72,712
Selling & admin.exp	49,170	Selling & admin. exp.	49,170
Operating income	$78,250.00	Operating income	$73,126.00

There is a difference of $5,124 between the absorption-costingoperating income and the variable-costing operating income. This$5,124 is caused by the different treatment of fixed factoryoverhead. Under absorption costing, the 2,100 units added to endinginventory took not only the $1.97 of variable manufacturing cost,but also $2.44 per unit in fixed overhead. Under variable costing,however, all the fixed factory overhead of $72,712 was expensed.None of it was added to units going into ending inventory.

Absorption-costing income -Variable-costing income	= Change in inventory Ã fixedoverhead rate
	= 2,100 units Ã $2.44 = $5,124

What if more units are sold than are produced? That is, what ifending inventory is less than beginning inventory? Let's look atthe comparative income statement assuming Fender sells 29,890units.

Absorption-CostingIncome		Variable CostingIncome
Sales	$269,308.9	Sales	$269,308.9
COGS ($4.41 Ã 29,890)	131,814.9	Variable COGS ($1.97 Ã 29,890)	58,883.3
Gross margin	$137,494	Contribution margin	$210,425.6
Less:		Fixed overhead	72,712
Selling & admin.exp	49,170	Selling & admin. exp.	49,170
Operating income	$88,324	Operating income	$88,543.6

Now we see that variable-costing income is higher thanabsorption costing income. This is because each of the 90 unitsthat came out of inventory had $2.44 of fixed overhead attached.However, this did not occur under variable costing.

Absorption-costing income -Variable-costing income	= Change in inventory Ã fixedoverhead rate
	= 90 units Ã $2.44 = $219.60

The following table summarizes the impact of changes ininventory on the difference between absorption-costing income andvariable-costing income.

Changes in Inventoryunder Absorption and Variable Costing
If	Then
Production > Sales	Absorption-costing income >Variable-costing income
Production < Sales	Variable-costing income >Absorption-costing income
Production = Sales	Absorption-costing income =Variable-costing income

The variable-costing income statement has an advantage inaddition to providing better signals regarding performance. It alsoprovides more useful information for management decision making.For example, how much more will Fender Company earn if it sells onemore unit? Under absorption costing, the per-unit gross profit is$4.60 ($9.01 - $4.41). However, that figure includes some fixedoverhead, and fixed overhead will not change if another unit isproduced and sold. The variable-costing gives more usefulinformation. Additional contribution margin of the extra unit is$7.04 ($9.01 - $1.97). The key insight of variable costing is thatfixed expenses do not change as units produced and sold change.Therefore, while the variable-costing income statement cannot beused for external reporting, it is a valuable tool for somemanagement decisions.

peachbee229

The plant manager of Spectra Products Manufacturing Plant has just reviewed a draft of his year-end financial statements. The plant manager receives a year-end bonus of 8% of the plant's operating income before tax. The year-end income statement provided by the controller was disappointing to say the least. After reviewing the numbers, the plant manager demanded that his controller go back and "work the numbers" again. He insisted that if he didn't see a better operating income number the next time around he would be forced to look for a new controller.

Spectra Products classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,570,000, are classified as period expenses. The plant manager suggested that warehousing costs be included as product costs because they are "definitely related to our product". The company produced 210,000 units during the period and sold 190,000 units.

1. If the controller reworks the numbers and reclassifies the warehouse costs as product costs, how much would operating income improve? Show all calculations.

2. Is the plant manager correct in saying the warehouse costs should be reclassified because they "definitely relate to our product"? Explain your answers.

3. How much will the plant manager benefit by this decision? Should the controller reclassify the costs? Explain why or why not.

orchidant912

1. Sydney's Barbecue reported the following information:

Sydney's Barbecue
Period Ending December 31, 20XX

Manufacturing costs	$5,400,000
Units manufactured	$54,000
Beginning inventory in Units	$ 0

Note: 45,600 units sold during year at $300 per unit

What is the amount of ending finished goods inventory for theperiod ending December 31, 20XX?

	$860,000
	$830,000
	$840,000
	$850,000
	$820,000

2.Net income reported under absorption costing will exceed netincome reported under variable costing for a given period if

production equals sales for thatperiod.

variable overhead exceeds fixedoverhead for that period.

production exceeds sales for thatperiod.

sales exceed production for that period.

A company manufactures wallets. Last month's costs were aslisted below:

Direct materials	$246,000
Direct labor	$175,000
Manufacturing Overhead	$73,000

What were the conversion costs for the month?

$248,000

$494,000

$421,000

$246,000

4. Which of the following are classified as manufacturingoverhead?

Indirect labor and indirectmaterials

Direct materials and directlabor

Factory rent and direct labor

All materials

5.Baxter Company produces Frisbees using a three-step sequentialprocess that includes molding, coloring, and finishing. At whatstage would the sets be allocated Manufacturing Overhead?

When the Frisbees are in WIPInventory-Coloring

When the Frisbees are in WIPInventory-Finishing

When the Frisbees are in WIPInventory-Molding

All of the above

6.Which method are managers using when they use their judgmentto classify costs as variable, fixed, or mixed?

Low-high method

Regression analysis

Account analysis

High-low method

7.Which of the following is not a way in which management canuse job cost information?

Determining the balance in rawmaterials inventory

Preparing the financialstatements

Assessing and comparing theprofitability of each product type

Using the cost information in determining the bid price forcustom orders

8.A factory janitor's wages would be classified as _________when determining the cost of a manufactured product.

an indirect cost

a period cost

a direct cost

none of the above

Tall Timbers reports the following data for its first year ofoperation:

Work in process inventory, beginning	$ 0
Work in process inventory, ending	$50,200
Manufacturing overhead	$25,400
Direct materials used	$7,700
Direct Labor	$60,000
Finished goods inventory, beginning	$ 0
Finished goods inventory, ending	$20,000
Cost of goods manufactured	$42,900

What is the cost of goods sold?

$22,900

$76,000

$73,100

$42,900

10.

A deodorant manufacturer offers the following information:

WIP Inventory, January 1	0 units
Units started	33,600 units
Units completed and transferred out	11,200 units
WIP Inventory, December 31	22,400 units
Direct materials	$276,480
Direct labor	$585,000
Manufacturing Overhead	$328,920

The units in ending WIP Inventory were 60% complete formaterials and 40% complete for conversion costs.

On December 31, what are the total equivalent units for directmaterials?

47,040

33,600

20,160

24,640

11. How is the cost of indirect materials used in the factoryrecorded?

Credit to Raw Materials Inventoryaccount

Credit to Manufacturing Overheadaccount

Credit to Direct Materials Expenseaccount

Credit to Work-in-Process Inventory account

12. XYZ uses job costing. Actual manufacturing overhead for theperiod is $20,300 while allocated manufacturing overhead is$18,200. What entry will close the manufacturing overheadbalance?

	Debit the Cost of Goods Soldaccount and credit the Finished Goods Inventory account for$2,100.
	Debit the Manufacturing Overheadaccount and credit the Work-in-Process account for $2,100.
	Debit the Cost of Goods Soldaccount and credit the Manufacturing Overhead account for$2,100.
	Debit the Manufacturing Overhead account and credit the Cost ofGoods Sold account for $2,100.

ACCT 2101 : ACCT 2101 Test 1 Study Guide

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