201B Exam 3 Practice

Exercise 6-12 (30 minutes)

1 a. Under variable costing, only the variable manufacturing costs are included in product costs.

Year 1 Year 2Direct materials $20 $20Direct labor 12 12Variable manufacturing overhead 4 4 Variable costing unit product cost $36 $36

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.

1 b.Year 1 Year 2

Sales $2,000,000$2,500,00

0Variable expenses:

Variable cost of goods sold @ $36 per unit 1,440,000 1,800,000

Variable selling and administrative @ $3 per unit 120,000

150,00 0

Total variable expenses 1,560,000 1,950,00

0

Contribution margin 440,000 550,00

0Fixed expenses:

Fixed manufacturing overhead 200,000 200,000Fixed selling and administrative 80,000 80,000

Total fixed expenses 280,000 280,00

0

Net operating income (loss) $ 160,000 $ 270,00

0

2 a. The unit product costs under absorption costing:

Year 1

Year 2

Direct materials $20 $20

Direct labor 12 12Variable manufacturing overhead 4 4Fixed manufacturing overhead *4 **5 Absorption costing unit product

cost $40 $41

* $200,000 ÷ 50,000 units = $4 per unit.

** $200,000 ÷ 40,000 units = $5 per unit.

Exercise 6-12 (continued)

2 b. The absorption costing income statements appears below:

Year 1 Year 2

Sales$2,000,00

0 $2,500,000

Cost of goods sold*1,600,00

0*

*2 ,040,000 Gross margin 400,000 460,000Selling and administrative

expenses 200,00

0 2 30,000

Net operating income$ 200,00

0 $ 230,000

* 40,000 units × $40 per unit = $1,600,000** (40,000 units × $41 per unit) + (10,000 units × $40 per

unit) = $2,040,000

3. The net operating incomes are reconciled as follows:

Year 1 Year 2Variable costing net operating income

(loss) $ 160,000$ 270,00

0Add: Fixed manufacturing overhead

cost deferred in inventory under absorption costing (10,000 units × $4 per unit) 40,000

Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing (10,000 units × $4 per unit)

(40,00 0)

Absorption costing net operating income

$ 200,00 0

$ 230,00 0


1. $75,000 × 40% CM ratio = $30,000 increased contribution margin in Dallas. Because the fixed costs in the office and in the company as a whole will not change, the entire $30,000

would result in increased net operating income for the company.

It is incorrect to multiply the $75,000 increase in sales by Dallas’ 25% segment margin ratio. This approach assumes that the segment’s traceable fixed expenses increase in proportion to sales, but if they did, they would not be fixed.

2. a. The segmented income statement follows:

SegmentsTotal Company Houston DallasAmount % Amount % Amount %

Sales$800,00

0 100.0$200,00

0 100$600,00

0 100Variable

expenses 420,000 52.5 60,000 30 360,000 60 Contribution

margin 380,000 47.5 140,000 70 240,000 40Traceable fixed

expenses 168,000 21.0 78,000 39 90,000 15 Office segment

margin 212,000 26.5$

62,000 31 $150,00

0 25 Common fixed

expenses not traceable to segments 120,000 15.0

Net operating income

$ 92,000 11.5

b. The segment margin ratio rises and falls as sales rise and fall due to the presence of fixed costs. The fixed expenses are spread over a larger base as sales increase.

In contrast to the segment ratio, the contribution margin ratio is stable so long as there is no change in either variable expenses or the selling price of a unit of service.


1. Priston CompanyDirect Materials Budget

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Required production 6,000 7,000 8,000 5,000Raw materials per unit × 3 × 3 × 3 × 3 Production needs 18,000 21,000 24,000 15,000Add desired ending inventory 4,200 4,800 3,000 3,700 Total needs 22,200 25,800 27,000 18,700Less beginning inventory 3,600 4,200 4,800 3,000 Raw materials to be purchased 18,600 21,600 22,200 15,700 Cost of raw materials to be

purchased at $2.50 per pound $46,500 $54,000 $55,500 $39,250

Schedule of Expected Cash Disbursements for Materials

Accounts payable, beginning balance

$11,775

1st Quarter purchases 32,550 $13,9502nd Quarter purchases 37,800 $16,2003rd Quarter purchases 38,850 $16,6504th Quarter purchases 27,475 Total cash disbursements for

materials$44,325 $51,750 $55,050 $44,125

Exercise 7-11 (continued)

2. Priston CompanyDirect Labor Budget

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter Year

Units to be produced 6,000 7,000 8,000 5,000 26,000

Direct labor time per unit (hours) × 0.50 ×

0.50 ×

0.50 ×

0.50Total direct labor-hours needed 3,000 3,500 4,000 2,500 13,000

Direct labor cost per hour×

$12.00×

$12.00×

$12.00×

$12.00 $12.00

Total direct labor cost$ 36,000 $ 42,00

0$ 48,00

0$ 30,00

0$156,00


1.

1.

1.

Harveton CorporationDirect Labor Budget

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Units to be produced 16,000 15,000 14,000 15,000Direct labor time per unit

(hours) 0.80 0.80 0.80 0.80

Total direct labor-hours needed

12,800 12,000 11,200 12,000

Direct labor cost per hour $11.50 $11.50 $11.50 $11.50Total direct labor cost $147,20

0$138,00

0$128,80

0$138,00

0

2.

1.

1.

Harveton CorporationManufacturing Overhead Budget

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Budgeted direct labor-hours 12,800 12,000 11,200 12,000Variable overhead rate $2.50 $2.50 $2.50 $2.50Variable manufacturing

overhead $ 32,000 $ 30,000 $ 28,000 $ 30,000Fixed manufacturing overhead 90,000 90,000 90,000 90,000 Total manufacturing overhead 122,000 120,000 118,000 120,000Less depreciation 34,000 34,000 34,000 34,000 Cash disbursements for

manufacturing overhead $ 88,000 $ 86,000 $ 84,000 $ 86,000

Problem 8-18A (45 minutes)

1. a.

Standard Quantity Allowed for Actual

Output,at Standard Price

(SQ × SP)

Actual Quantityof Input,

at Standard Price(AQ × SP)

Actual Quantityof Input,

at Actual Price(AQ × AP)

20,000 pounds* × $2.50 per pound

= $50,000

19,800 pounds × $2.50 per pound

= $49,500


= $73,750

Materials quantity variance = $500 F


= $62,500

Materials price variance

= $11,250 U

*5,000 ingots × 4.0 pounds per ingot = 20,000 pounds

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)= $2.50 per pound (19,800 pounds – 20,000 pounds) = $500 F

Materials price variance = AQ (AP – SP)= 25,000 pounds ($2.95 per pound – $2.50 per pound) = $11,250 U

Problem 8-18A (continued)

1. b.

Standard Hours Allowed

for Actual Output, at Standard Rate

(SH × SR)

Actual Hours of Input,

at Standard Rate(AH × SR)


at Actual Rate(AH × AR)

3,000 hours* × $9.00 per hour

= $27,000

3,600 hours × $9.00 per hour

= $32,400


= $31,320

Labor efficiency variance

= $5,400 U

Labor rate variance

= $1,080 FSpending variance = $4,320 U

*5,000 ingots × 0.6 hour per ingot = 3,000 hours


Labor efficiency variance = SR (AH – SH)= $9.00 per hour (3,600 hours – 3,000 hours) = $5,400 U

Labor rate variance = AH (AR – SR)= 3,600 hours ($8.70 per hour – $9.00 per hour) = $1,080 F


1. c.

Standard Hours Allowed

for Actual Output, at Standard Rate

(SH × SR)


at Standard Rate(AH × SR)


at Actual Rate(AH × AR)

1,500 hours* × $2.00 per hour

= $3,000


= $3,600 $4,320

Variable overhead efficiency variance

= $600 U

Variable overhead rate variance

= $720 USpending variance = $1,320 U

*5,000 ingots × 0.3 hours per ingot = 1,500 hours


Variable overhead efficiency variance = SR (AH – SH)= $2.00 per hour (1,800 hours – 1,500 hours) = $600 U

Variable overhead rate variance = AH (AR – SR)= 1,800 hours ($2.40 per hour* – $2.00 per hour) = $720 U*$4,320 ÷ 1,800 hours = $2.40 per hour


2. Summary of variances:

Material quantity variance $ 500 FMaterial price variance 11,250 ULabor efficiency variance 5,400 ULabor rate variance 1,080 FVariable overhead efficiency

variance 600 UVariable overhead rate variance 720 UNet variance $16,390 U

The net unfavorable variance of $16,390 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of $80,000 to $96,390:

Budgeted cost of goods sold at $16 per ingot $80,000

Add the net unfavorable variance (as above) 16,390

Actual cost of goods sold $96,390

This $16,390 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net loss for the month.

Budgeted net operating income $15,000Deduct the net unfavorable variance added

to cost of goods sold for the month 16,390 Net operating loss $(1,390)

3. The two most significant variances are the materials price variance and the labor efficiency variance. Possible causes of the variances include:

Materials price variance:

Outdated standards, uneconomical quantity purchased, higher quality materials, high-cost method of transport.

Labor efficiency Poorly trained workers, poor quality

variance: materials, faulty equipment, work interruptions, inaccurate standards, insufficient demand.

Abe Company, which has only one product, has provided the following data concerning its most recent month of operations:

What is the unit product cost for the month under variable costing?

A. $99

B. $81

C. $106

D. $88

What is the unit product cost for the month under absorption costing?

A. $88

B. $99

C. $81

D. $106

What is the net operating income for the month under variable costing?

A. $11,400

B. $16,800

C. $5,400

D. $(12,900)

What is the net operating income for the month under absorption costing?

A. $11,400

B. $(12,900)

C. $16,800

D. $5,400

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201B Exam 3 Practice