Flashcards in STUDY UNIT EIGHTEEN COSTING FUNDAMENTALS Deck (27):

1

##
All manufacturing costs under GAAP must be treated as product costs.

True.

False.

###
True.

Your answer is correct.

Under GAAP, all manufacturing costs (direct materials, direct labor, variable overhead, and fixed overhead) must be treated as product costs, i.e., not recognized as expenses until the inventory is sold. At the same time, no portion of selling and administrative costs may be treated as product costs

2

##
Contribution margin is the amount available to the firm to cover variable costs.

True.

False.

###
False.

Your answer is correct.

Contribution margin is the amount available to the firm to cover fixed costs.

3

##
The relevant range defines the limits within which fixed costs are changeable.

True.

False.

###
False.

Your answer is correct.

The relevant range defines the limits within which fixed costs are not changeable. It is established by the efficiency of a company’s current manufacturing plant, its agreements with labor unions and suppliers, etc.

4

##
At the breakeven point, the contribution margin equals total

A Sales revenues.

B Variable costs.

C Fixed costs.

D Selling and administrative costs.

###
C Fixed costs.

This answer is correct.

No profit or loss occurs at the breakeven point. Thus, operating income equals zero, and fixed cost must equal the contribution margin (total revenue – total variable cost).

5

##

Johnson Co., distributor of candles, has reported the following budget assumptions for Year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for Year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson’s only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of Year 1. What is the budgeted gross margin for Year 1?

A $75,000

B $60,000

C $90,000

D $70,000

###
D $70,000

This answer is correct.

The budgeted payment to the vendor is $300,000. Of this amount, $100,000 is to settle the beginning balance of accounts payable. Accordingly, the inventory purchases for Year 1 equal $350,000 [($300,000 cash paid – $100,000 beginning accounts payable) + ($100,000 × 150%) ending accounts payable]. The cost of goods sold for a retailer equals purchases adjusted for the change in inventory. Given the budget assumptions, purchases is also the cost of goods sold because beginning and ending inventory are the same. Sales are therefore $420,000 ($350,000 purchases × 120%), and the budgeted gross margin is $70,000 ($420,000 sales – $350,000 COGS).

6

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A company’s target gross margin is 40% of the selling price of a product that costs $89 per unit. The product’s selling price should be

A $142.40

B $222.50

C $148.33

D $124.60

###
C $148.33

This answer is correct.

The gross margin is calculated as [1 – (Unit cost ÷ Unit selling price)]. The question gives a company’s target gross margin as 40%. Rearranging the gross margin equation, the unit selling price equals [Unit cost ÷ (1 – Gross margin)]. Thus, the product’s selling price is $148.33 [$89 ÷ (1 – .40)].

7

##
Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:

Fixed costs

$21,000

Variable costs

33,000

The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

A $40,750

B $58,050

C $36,700

D $54,000

###
A $40,750

This answer is correct.

Given that Clay has excess capacity, it will incur neither increased fixed costs nor opportunity costs if it accepts the special order. Thus, the incremental cost of the order (the minimum acceptable price) will be $40,750 ($33,000 variable costs + $7,750 cost of external design).

8

##
During the month just ended, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes

A Scrap, but not spoilage.

B Scrap, normal spoilage, and abnormal spoilage.

C Scrap and normal spoilage, but not abnormal spoilage.

D Normal spoilage, but neither scrap nor abnormal spoilage.

###
C Scrap and normal spoilage, but not abnormal spoilage.

This answer is correct.

Scrap consists of direct material left over from the production process. It can either be sold, in which case it reduces factory overhead, or discarded, in which case it is absorbed into the cost of the good output. Normal spoilage occurs under normal operating conditions. Because it is expected under efficient operations, it is treated as a product cost. It is absorbed into the cost of the good output. Abnormal spoilage is not expected to occur under normal, efficient operating conditions. Abnormal spoilage is typically treated as a period cost (a loss).

9

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Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?

A $2,329

B $1,935

C $2,277

D $1,980

###
A $2,329

This answer is correct.

Costs of the product must be 85% of sales to achieve a 15% profit on sales. Hence, sales must be $1,164,706 ($990,000 ÷ .85). The price per unit is $2,329 ($1,164,706 ÷ 500)

10

##
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00, variable manufacturing costs to increase 33.3%, fixed costs to increase 10%, and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year’s sales by 1,000 units. How many units does the company expect to sell this year?

A 22,600

B 21,600

C 21,000

D 21,960

###
A 22,600

This answer is correct.

The number of units the company expects to sell this year can be found once the number of units sold last year is derived. Fixed costs can be found using breakeven analysis.

Breakeven point in units

=

Fixed costs (FC) ÷ Unit contribution margin (UCM)

20,000 units

=

FC ÷ ($7.50 sales price – $2.25 unit variable manufacturing cost)

20,000 units

=

FC ÷ $5.25 UCM

$105,000

=

FC

Fixed costs can then be used to calculate the number of units sold last year.

[($5.25 UCM × Units sold last year) –

$105,000 FC] × (1 – .4)

=

$5,040 net income

($5.25 UCM × Units sold last year) –

$105,000 FC

=

$8,400

$5.25 UCM × Units sold last year

=

$113,400

Units sold last year

=

21,600

The company expects to sell 1,000 more units this year than it did last year. Thus, it expects to sell 22,600 units.

View Subunit 18.5 Outline

11

##
Fab Co. manufactures textiles. Among Fab’s manufacturing costs for the month just ended were the following salaries and wages:

Loom operators $120,000

Factory foremen 45,000

Machine mechanics 30,000

What was the amount of Fab’s direct labor for the month just ended?

A $165,000

B $120,000

C $195,000

D $150,000

###
B $120,000

This answer is correct.

Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Because the wages of loom operators are identifiable with the production of finished goods, the $120,000 wages are a direct labor cost. However, because the salaries and wages of the factory foremen and machine mechanics are not identifiable with the production of finished goods, the $45,000 and $30,000 are not direct labor costs. Thus, $120,000 is the amount of direct labor.

View Subunit 18.2 Outline

12

##
The following information is taken from Wampler Co.’s current-year contribution income statement:

Sales $200,000

Contribution margin 120,000

Fixed costs 90,000

Income taxes 12,000

What was Wampler’s margin of safety?

A $182,000

B $168,000

C $50,000

D $150,000

###
C $50,000

This answer is correct.

The margin of safety is the excess of sales over breakeven sales. Thus, income taxes are not relevant because the margin of safety is a pretax amount. Sales are given ($200,000). Breakeven sales in dollars can be calculated as follows:

Breakeven sales

=

Fixed costs ÷ Contr. margin ratio

=

$90,000 ÷ ($120,000 ÷ $200,000)

=

$90,000 ÷ 0.6

=

$150,000

The margin of safety is thus $50,000 ($200,000 sales – $150,000 BE sales).

13

##
The following information pertains to Clove Co. for the month just ended:

Budgeted sales $1,000,000

Breakeven sales 700,000

Budgeted contribution margin 600,000

Cash flow breakeven 200,000

Clove’s margin of safety is

A $500,000

B $400,000

C $300,000

D $800,000

###
C $300,000

This answer is correct.

The margin of safety measures the amount by which sales may decline before losses occur. It is the excess of budgeted or actual sales over the breakeven sales. Given that the budgeted sales are $1,000,000 and the breakeven sales are $700,000, the margin of safety is $300,000 ($1,000,000 – $700,000).

View Subunit 18.6 Outline

14

##
A company produces and sells two products. The first product accounts for 75% of sales, and the second product accounts for the remaining 25% of sales. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the breakeven point, what number of units of the first product will have been sold?

A 39,000

B 52,000

C 25,000

D 14,625

###
A 39,000

This answer is correct.

To find the breakeven point when a company makes multiple products, total fixed costs are divided by the weighted-average unit contribution margin (UCM). Products 1 and 2 account for 75% and 25% of total unit sales, respectively. Thus, the weighted-average UCM for a composite unit (3 units for Product 1 + 1 unit for Product 2) is calculated as follows:

Product

UCM

Units per Composite Unit

Weighted-Average Composite UCM

1

($10 – $6) = $4

×

3

=

$12

2

($25 – $13) = $12

×

1

=

12

$24

The total number of composite units is 13,000 [($100,000 FC of Product 1 + $212,000 FC of Product 2) ÷ $24 wt. avg. UCM]. The total units of products 1 and 2 are 39,000 and 13,000, respectively.

Product 1: 13,000 × 3 = 39,000

Product 2: 13,000 × 1 = 13,000

View Subunit 18.6 Outline

15

##
Del Co. has fixed costs of $100,000 and breakeven sales of $800,000. What is its projected profit at $1,200,000 sales?

A $200,000

B $400,000

C $150,000

D $50,000

###
D $50,000

This answer is correct.

Del’s contribution margin ratio (CMR) can be calculated as follows:

BEP in dollars

=

Fixed costs ÷ CMR

BEP in dollars × CMR

=

Fixed costs

CMR

=

Fixed costs ÷ BEP in dollars

=

$100,000 ÷ $800,000

=

12.5%

Thus, at sales of $1,200,000, contribution margin is $150,000 ($1,200,000 × 12.5%), and operating income is $50,000 ($150,000 contribution margin – $100,000 fixed costs).

View Subunit 18.5 Outline

16

##
Del Co. has fixed costs of $100,000 and breakeven sales of $800,000. What is its projected profit at $1,200,000 sales?

A. $150,000

B. $50,000

C. $200,000

D. $400,000

###
Answer (B) is correct.

Del’s contribution margin ratio (CMR) can be calculated as follows:

BEP in dollars

=

Fixed costs ÷ CMR

BEP in dollars × CMR

=

Fixed costs

CMR

=

Fixed costs ÷ BEP in dollars

=

$100,000 ÷ $800,000

=

12.5%

Thus, at sales of $1,200,000, contribution margin is $150,000 ($1,200,000 × 12.5%), and operating income is $50,000 ($150,000 contribution margin – $100,000 fixed costs).

(18.5.78)

17

##
Johnson Co., distributor of candles, has reported the following budget assumptions for Year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for Year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson’s only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of Year 1. What is the budgeted gross margin for Year 1?

A. $60,000

B. $70,000

C. $90,000

D. $75,000

###
B. $70,000

Answer (B) is correct.

The budgeted payment to the vendor is $300,000. Of this amount, $100,000 is to settle the beginning balance of accounts payable. Accordingly, the inventory purchases for Year 1 equal $350,000 [($300,000 cash paid – $100,000 beginning accounts payable) + ($100,000 × 150%) ending accounts payable]. The cost of goods sold for a retailer equals purchases adjusted for the change in inventory. Given the budget assumptions, purchases is also the cost of goods sold because beginning and ending inventory are the same. Sales are therefore $420,000 ($350,000 purchases × 120%), and the budgeted gross margin is $70,000 ($420,000 sales – $350,000 COGS).

18.2.17)

18

##
Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?

A. $96,000

B. $80,000

C. $24,000

D. $16,000

###
C. $24,000

Answer (C) is correct.

Sales minus the margin of safety equals the breakeven point ($200,000 – $80,000 = $120,000). Fixed costs equal the contribution margin at the breakeven point, so fixed costs are $24,000 ($120,000 × 20%).

(18.6.92)

19

##
A company produces and sells two products. The first product accounts for 75% of sales, and the second product accounts for the remaining 25% of sales. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the breakeven point, what number of units of the first product will have been sold?

A. 25,000

B. 39,000

C. 14,625

D. 52,000

###
Answer (B) is correct.

To find the breakeven point when a company makes multiple products, total fixed costs are divided by the weighted-average unit contribution margin (UCM). Products 1 and 2 account for 75% and 25% of total unit sales, respectively. Thus, the weighted-average UCM for a composite unit (3 units for Product 1 + 1 unit for Product 2) is calculated as follows:

Product

UCM

Units per Composite Unit

Weighted-Average Composite UCM

1

($10 – $6) = $4

×

3

=

$12

2

($25 – $13) = $12

×

1

=

12

$24

The total number of composite units is 13,000 [($100,000 FC of Product 1 + $212,000 FC of Product 2) ÷ $24 wt. avg. UCM]. The total units of products 1 and 2 are 39,000 and 13,000, respectively.

Product 1: 13,000 × 3 = 39,000

Product 2: 13,000 × 1 = 13,000

(18.6.102)

20

##
A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?

A. Total fixed costs do not change, and operating income increases.

B. Total fixed costs increase, and operating income decreases.

C. Total fixed costs increase, and operating income increases.

D. Total fixed costs do not change, and operating income does not change.

###
A. Total fixed costs do not change, and operating income increases.

Answer (A) is correct.

Variable costs per unit and fixed costs in total do not change. Because the company has excess capacity, accepting a project with a positive gross profit margin increases operating income.

(18.4.58)

21

##
Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?

A. $2,329

B. $2,277

C. $1,980

D. $1,935

###
A. $2,329

Answer (A) is correct.

Costs of the product must be 85% of sales to achieve a 15% profit on sales. Hence, sales must be $1,164,706 ($990,000 ÷ .85). The price per unit is $2,329 ($1,164,706 ÷ 500).

22

##
Snyder Co. manufactures fans with direct material costs of $10 per unit and direct labor of $7 per unit. A local carrier charges Snyder $5 per unit to make deliveries. Sales commissions are paid at 10% of the selling price. Fans are sold for $100 each. Indirect factory costs and administrative costs are $6,800 and $37,200 per month, respectively. How many fans must Snyder produce to break even?

A. 648

B. 530

C. 1,375

D. 564

###
A. 648

Answer (A) is correct.

The breakeven point in units is derived by dividing fixed costs by the unit contribution margin. Snyder has fixed costs of $44,000 per month ($6,800 indirect factory + $37,200 administrative). The unit contribution margin is $100 – $10 – $7 – $5 – ($100 × 10%) = $68. The breakeven point is therefore $44,000 ÷ $68 = 647.06 units. However, Snyder cannot make a fractional unit, so it must produce 648 units

(18.5.81)

23

##
Spring Co. had two divisions: A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A was operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?

A. $25

B. $40

C. $20

D. $15

###
A. $25

Answer (A) is correct.

Division A has no idle capacity. It will forgo $25 of revenue and a $10 contribution margin ($25 – $15 variable cost) for each unit of X transferred to Division B. Consequently, the price that optimizes decision making for the company as a whole is the $25 market price (assuming all the units transferred internally could be sold externally for $25). The true unit contribution margin for Y is $35 ($100 price – $40 variable cost of Y – $15 variable cost of X – $10 unit contribution margin of X forgone).

(18.4.52)

24

##
In a lean accounting environment, a company accepts a special order to make 200 units of a product each month for the next 2 months for $130 per unit. The company normally sells the unit for $170 per unit with variable costs per unit at $80. The company plans to use excess capacity. By what amount would this special order increase profit?

A. $20,000

B. $16,000

C. $36,000

D. $52,000

###
A. $20,000

Answer (A) is correct.

When a manufacturer has excess production capacity, there is no opportunity cost involved when accepting a special order. The total increase in profit from the special order is calculated as follows:

Sales price

$130

Variable costs

$80

Contribution margin per unit ($130 – $80)

$50

Profit for 400 units (400 × $50)

$20,000

(18.4.67)

25

##
During the month just ended, Nale Co. used $300,000 of direct materials. At month end, Nale’s direct materials inventory was $50,000 more than it was at the beginning of the month. Direct material purchases during the month amounted to

A. $300,000

B. $250,000

C. $0

D. $350,000

###
D. $350,000

Answer (D) is correct.

Direct materials costs are the costs of new materials included in finished goods that can be feasibly traced to those goods. The beginning direct materials inventory plus the direct material purchases minus ending direct materials inventory equals the direct materials used. Because the direct materials inventory increased during the month, the increase can be added to the direct materials used to yield the amount of purchases. Thus, the direct materials purchases for the month amount to $350,000 ($300,000 + $50,000).

(18.2.23)

26

##
The sale of scrap from a manufacturing process usually is recorded as a(n)

A. Decrease in finished goods control.

B. Decrease in factory overhead control.

C. Increase in finished goods control.

D. Increase in factory overhead control

###
B. Decrease in factory overhead control.

Answer (B) is correct.

The sale of scrap arising from a manufacturing process is usually recorded by crediting factory overhead control. The effect is to allocate the net cost of the scrap (historical cost – disposal proceeds) to the good units produced.

(18.3.46)

27