Tut 1Soln Managerial ACC

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Tutorial 1, Tues January 29, 31.

Problem 2-19 (Cost classification, behavior)

1.

Cost BehaviorSelling or

Administrative

Cost Item Variable Fixed Cost Factory labor, direct ................... $118,000 Advertising ................................ $50,000 $50,000Factory supervision .................... 40,000 Property taxes, factory building .. 3,500 Sales commissions ..................... 80,000 80,000Insurance, factory ..................... 2,500

Depreciation, administrativeoffice equipment ..................... 4,000 4,000Lease cost, factory equipment .... 12,000 Indirect materials, factory .......... 6,000 Depreciation, factory building ..... 10,000 Administrative office supplies ..... 3,000 3,000 Administrative office salaries ...... 60,000 60,000Direct materials used ................. 94,000 Utilities, factory ......................... 20,000 Total costs ................................ $321,000 $182,000 $197,000



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Problem 2-19 (continued)

2.Direct ................................................. $212,000Indirect ............................................... 94,000

Total ................................................... $306,000$306,000 ÷ 2,000 sets = $153 per set

3. The average product cost per set would increase if the productiondrops. This is because the fixed costs would be spread over fewer units,causing the average cost per unit to rise.

4. a. Yes, the president may expect a minimum price of $153, which is theaverage cost to manufacture one set. He might expect a price even

higher than this to cover a portion of the administrative costs as well.The brother-in-law probably is thinking of cost as including only directmaterials, or, at most, direct materials and direct labor (DM + DL =Prime Cost). Direct materials alone would be only $47 per set, andPrime cost would be only $106.

b. The term is . Since the company is operatingat full capacity and if the company sells all items then the full, regularprice of a set might be appropriate here. Once a company operatesat full capacity this amount is the sacrifice or the amount that must

be given up (benefit forgone so to speak) to sell a set to the brother-in-law. Conversely if the company does not sell all the units thenthere is no benefit forgone or no sacrifice , in which case the it likelyto charge the brother-in-law ‘at cost’



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Case 2-27 (Missing data, Income STT, COGM)

1 The conceptual error ison the

income statement filed by the company’s accountant. Product costs(e.g., direct materials, direct labor, and manufacturing overhead) shouldbe assigned to inventory accounts and flow through to the income

statement asBecause there were ending inventories, some of the product costs

should appear on the balance sheet as assets rather than on the incomestatement as expenses.

2. Solar Technology, Inc.Schedule of Cost of Goods Manufactured

For the Quarter Ended March 31

Direct materials:Raw materials inventory, beginning .............. $ 0 Add: Purchases of raw materials ................... 360,000Raw materials available for use .................... 360,000Deduct: Raw materials inventory, ending ...... 10,000Raw materials used in production ................. $350,000

Direct labor .................................................... 70,000

Manufacturing overhead ................................. 410,000Total manufacturing costs ............................... 830,000 Add: Work in process inventory, beginning ...... 0Total mfg costs 830,000Deduct: Work in process inventory, ending ...... 50,000Cost of finished goods manufactured ............... $780,000



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Case 2-27 (continued)

3. Before an income statement can be prepared, the cost of the 8,000batteries in the ending finished goods inventory must be determined. Altogether, the company produced 40,000 batteries during the quarter;

thus, the production cost per battery was:

Cost of goods manufactured $780,000= =$19.50 per unit

Batteries produced during the quarter 40,000 units

Because 8,000 batteries (40,000 – 32,000 = 8,000) were in the finishedgoods inventory at the end of the quarter, the total cost of thisinventory was:

8,000 units × $19.50 per unit = $156,000.

With this and other data from the case, the company’s incomestatement for the quarter can be prepared as follows:

Solar Technology, Inc.Income Statement

For the Quarter Ended March 31

Sales (32,000 batteries) .............................. $960,000Cost of goods sold:

Finished goods inventory, beginning .......... $ 0 Add: Cost of goods manufactured ............ 780,000Goods available for sale ............................ 780,000Deduct: Finished goods inventory, ending . 156,000 624,000

Gross margin .............................................. 336,000Selling and administrative expenses ............. 290,000Net operating income .................................. $ 46,000



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Case 2-27 (continued)

4. No, the insurance company probably does not owe Solar Technology$226,000. The key question is how “cost” was defined in the insurance

contract. It is most likely that the insurance contract limitsreimbursement for losses to those costs that would normally beconsidered product costs—in other words, direct materials, direct labor,and manufacturing overhead. The $226,000 is overstated because itincludes elements of selling and administrative expenses as well asproduct costs. The $226,000 also does not recognize that some costsincurred during the period are in the ending Raw Materials and Work inProcess inventory accounts, as explained in part (1) above. Theinsurance company’s liability is probably just $156,000, which is the

amount of cost associated with the ending Finished Goods inventory asshown in part (3) above.



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Problem 3-12 (Cost Behavior, H-L method, Contribution format Stt)

1. Cost of goods sold ................... Variable Advertising expense ................ FixedShipping expense .................... MixedSalaries and commissions ........ MixedInsurance expense .................. FixedDepreciation expense .............. Fixed

2. Analysis of the mixed expenses:

Units

Shipping

Expense

Salaries and

Commissions

ExpenseHigh level of activity ..... 5,000 A$38,000 A$90,000

Low level of activity ...... 4,000 34,000 78,000Change ........................ 1,000 A$ 4,000 A$12,000

Variable cost element:

Change in cost Variable rate =

Change in activity

A$4,000Shipping expense: = A$4 per unit

1,000 units

A$12,000Salaries and commissions expense: = A$12 per unit

1,000 units

Fixed cost element:

ShippingExpense

Salaries and

CommissionsExpense

Cost at high level of activity .... A$38,000 A$90,000

Less variable cost element:5,000 units × A$4 per unit ... 20,0005,000 units × A$12 per unit . 60,000

Fixed cost element ................. A$18,000 A$30,000



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Problem 3-12 (continued)

Using the mixed cost formula Y = Fixed Cost + Var. Cost Rate x Qty ,

the cost formulae for the 2 mixed costs are:

Shipping expense: A$18,000 per month plus A$4 per unit

or Y = A$18,000 + A$4X

Salaries and commissions expense: A$30,000 per month plus A$12 per unit

or Y = A$30,000 + A$12X

3.

Morrisey & Brown, Ltd.

Income Statement

For the Month Ended September 30

Sales (5,000 units × A$100 per unit) ......... A$500,000 Variable expenses:

Cost of goods sold

(5,000 units × A$60 per unit) ............. A$300,000Shipping expense

(5,000 units × A$4 per unit) ................ 20,000Salaries and commissions expense

(5,000 units × A$12 per unit) .............. 60,000 380,000Contribution margin .................................. 120,000Fixed expenses: Advertising expense ............................... 21,000Shipping expense .................................. 18,000Salaries and commissions expense .......... 30,000Insurance expense ................................. 6,000Depreciation expense ............................. 15,000 90,000

Net operating income ............................... A$ 30,000



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Problem 4-25 Sales Mix, BE1. Carbex, Inc.

Income Statement For April

Standard Deluxe Total

Amount % Amount % Amount %Selling Price $60 $75

Sales ............................ $240,000 100 $150,000 100 $390,000 100.0 Variable expenses:

Production (COGS) ..... 60,000 25 60,000 40 120,000 30.8Sales commission ....... 36,000 15 22,500 15 58,500 15.0

Total variable expenses . 96,000 40 82,500 55 178,500 45.8Contribution margin ...... $144,000 $ 67,500 45 $211,500 54.2

Fixed expenses: Advertising ................ 105,000Depreciation .............. 21,700 Administrative ............ 63,000

Total fixed expenses ...... 189,700Net operating income .... $ 21,800

Carbex, Inc.

Income Statement For May

Standard Deluxe Total

Amount % Amount % Amount %

Sales .............................. $60,000 100 $375,000 100 $435,000 100.0

Variable expenses:

Production (COGS) ....... 15,000 25 150,000 40 165,000 37.9

Sales commission ......... 9,000 15 56,250 15 65,250 15.0

otal variable expenses .... 24,000 40 206,250 55 230,250 52.9

Contribution margin ........ $36,000 60 $168,750 45 204,750 47.1

Fixed expenses: Advertising................... 105,000

Depreciation ................ 21,700

Administrative .............. 63,000

otal fixed expenses ........ 189,700

Net operating income ...... $ 15,050



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2. The sales mix has shifted from Standard sets to Deluxe sets. This shifthas caused a decrease in the company’s overall CM ratio from 54.2% in

April to 47.1% in May. For this reason, even though total sales (indollars) are greater, net operating income is lower.

3. Sales commissions could be based on contribution margin rather thanon sales price. A flat rate on total contribution margin, as the textsuggests, might encourage the salespersons to emphasize the productwith the greatest contribution to the profits of the firm. Alternatively wecould also consider using different % commission for different productso as to maximize the company’s profitability and not impair the bottom

line.

4. a. The break-even in dollar sales can be computed as follows:

Fixed expenses $189,700Dollar sales to = = = $350,000break even CM ratio 0.542

b. The break-even point is higher with May’s sales mix than with April’s.This is because the company’s overall CM ratio has gone down, i.e.,the sales mix has shifted from the more profitable to the lessprofitable units.Because the CM ratio is a denominator so the lower it is the higherthe BE$ assuming fixed cost remain unchanged.

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Tut 1Soln Managerial ACC