Chapter 6 - Decision Making

Question 1

What are prime costs?

Answer 1

Direct materials + direct labor

Question 2

What are conversion costs?

Answer 2

Direct labor + manufacturing overhead

Question 3

What is the journal entry to apply overhead? What is the journal entry for actual overhead? What is the journal to adjust for overhead?

Answer 3

Apply overhead

DR WIP control

CR Factory overhead applied

Actual overhead

DR Factory overhead control

CR cash

Question 4

What is the equation for absorption costing?

Answer 4

Question 5

What is the equation for variable costing?

Answer 5

Question 6

How is fixed overhead treated under absorption costing and under variable costing?

Answer 6

Under absorption costing, fixed overhead is only expensed in the period used and allocated per unit. It is included in product cost.

Under variable costing, fixed overhead is all expensed in the period the products are sold. It is NOT included in product cost.

Question 7

What is the formula to figure out if profit under absorption costing will be bigger than variable costing?

Answer 7

If production > sales, then profit under absorption is > profit under variable

Question 8

How can ending inventory and beginning inventory be used to determine if absorption costing or variable costing income will be bigger?

Answer 8

If ending inventory = beginning inventory, absorption income = variable income

If ending inventory > beginning inventory, absorption income > variable income

If ending inventory < beginning inventory, absorption income < variable income

Question 9

What is the calculation to find break even in units?

Answer 9

Fixed costs / (sales per unit - variable cost a unit)

Question 10

What is the calculation to find break even in sales dollars?

Answer 10

Fixed costs / contribution margin ratio

Contribution margin ratio = contribution margin / sales