Pickering Company produced and sold 45,000 units of a single product last year, with the following results: $\begin{array} { | c | r | } \hline \text { Sales revenue } & \$ 1.350,000 \\ \hline \text { Manufacturing costs: } & \\ \hline \text { Variable } & 585.000 \\ \hline \text { Fixcd } & 270.000 \\ \hline \text { Sclling costs: } & \\ \hline \text { Variable } & 40.500 \\ \hline \text { Fixcd } & 54,000 \\ \hline \text { Administrative cosis: } & \\ \hline \text { Variable } & 184.500 \\ \hline \text { Fixed } & 108.000 \\ \hline \end{array}$ Pickering's operating leverage factor was:

A) 4. B) 5. C) 6. D) 7. E) 8. A) 4. B) 5. C) 6. D) 7. E) 8.

Weber Company began operations at the start of the current year, having a production target of 60,000 units. Actual production totalled 60,000 units, and the company sold 95% of its manufacturing output at $50 per unit. The following costs were incurred: $\begin{array}{|l|r|} \hline{ \text { Manufacturing: } } \\ \hline \text { Direct materials used } & \text { S240,000 } \\ \hline \text { Direct labor } & 480,000 \\ \hline \text { Variable manufacturing overhead } & 360,000 \\ \hline \text { lixed manufacturing overhead } & 600,000 \\ \hline \text { Selling and administrative: } & \\ \hline \text { Variable } &180,000 \\ \hline \text { Fixed } & 630,000 \\ \hline \end{array}$ Required: A. Assuming the use of variable costing, compute the cost of Weber's ending finished-goods inventory. B. Compute the company's contribution margin. Would Weber disclose the contribution margin on a variable-costing income statement or an absorption-costing income statement? C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Weber include in the ending finished-goods inventory? D. Compute the company's gross margin.

A. Variable production costs total @#LAT-DLM&, or

Two sisters (Amy and Amanda) aspired to owning and operating companies in the same line of business. Amy believed in maintaining a very large, highly efficient manual labour force; Amanda, on the other hand, favored automated-production processes. One business was located in Brockville, Ontario and the other was located in Minto, New Brunswick. Recent data follow. $\begin{array} { lcc } & \text { Brockville } & { \text { Minto } } \\ \text { Sales } & \$ 3,000,000 & \$ 3,000,000 \\ \text { Contribution margin } & 2,800,000 & 1,500,000 \\ \text { Net income } & 50,000 & 50,000 \end{array}$ Required: A. Which of the two businesses, Brockville or Minto, has the highest level of (1) variable cost and (2) highest level of fixed cost? Explain your answer. B. Determine the probable owner of the firm located in (1) Brockville and (2) Minto. Briefly explain your answer. C. Compute the operating leverage factor for Brockville and Minto. D. Suppose that both Brockville and Minto had the opportunity to increase sales by 20%. Which of the two locations would experience a larger percentage change in net income? Why?

A. Given that both locations have identi

Exam 7: Cost-Volume-Profit Analysis, Absorption and Variable Costing

Contemporary Corp. sells a single product for $80. Variable costs are 40%% of the selling price, and the company has fixed costs that amount to $500,000. Current sales total 18,000 units. Each unit that Contemporary sells will:

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Question 1

Correct Answer:

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C

Information taken from Grille Corporation's May accounting records follows. Direct materials used \ 150,000 Direct labor 80,000 Variable manufacturing overhead 30,000 Fixed manufacturing overhead 100,000 Variable sclling and administrative costs 51,000 Fixed selling and administrative costs 60,000 Sales revenues 625,000 Required: A. Assuming the use of variable costing, compute the inventoriable costs for the month. B. Compute the month's inventoriable costs by using absorption costing. C. Assume that anticipated and actual production totalled 20,000 units, and that 18,000 units were sold during May. Determine the amount of fixed manufacturing overhead and fixed selling and administrative costs that would be expensed for the month under (1) variable costing and (2) absorption costing. D. Assume the same data as in requirement "C." Compute the contribution margin that would be reported on a variable-costing income statement

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Question 2

Correct Answer:

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. A.
$\begin{array}{lr}\text { Direct materials used } & \$ 150,000 \\\text { Direct labour } & 80,000 \\\text { Variable manufacturing overhead } & \underline{30,000}\\\text { Total }& \underline{\$ 260,000} \end{array}$

B.
$\begin{array}{lr}\text { Direct materials used } & \$ 150,000 \\\text { Direct labour } & 80,000 \\\text { Variable manufacturing overhead } & 30,000 \\\text { Fixed manufacturing overhead } & \underline{100,000} \\\text { Total } & \underline{\$ 360,000}\end{array}$ C. 1 Fixed manufacturing overhead: $\$ 100,000$
Fixed selling and administrative costs: $\$ 60,000$
2 Fixed manufacturing overhead: $(\$ 100,000 \div 20,000$ units $) \times 18,000$ units $=\$ 90,000$
Fixed selling and administrative costs: $\$ 60,000$

D. Variable manufacturing costs: $\$ 150,000+\$ 80,000+\$ 30,000=\$ 260,000$
Variable manufacturing costs per unit $\$ 260,000+20,000$ units $=\$ 13$
Contribution margin: $\$ 625,000-[(18,000 \times \$ 13)+\$ 51,000]=\$ 340,000$

The underlying difference between absorption costing and variable costing lies in the treatment of:

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Question 3

Correct Answer:

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C

Under throughput costing, the cost of a unit typically includes:

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Question 4

Pickering Company produced and sold 45,000 units of a single product last year, with the following results: Sales revenue \ 1.350,000 Manufacturing costs: Variable 585.000 Fixcd 270.000 Sclling costs: Variable 40.500 Fixcd 54,000 Administrative cosis: Variable 184.500 Fixed 108.000 Pickering's operating leverage factor was:

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Question 5

Management may be tempted to overproduce

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Question 6

The break-even point is the volume of activity where:

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Question 7

Which of the following would take place if a company experienced an increase in fixed costs, all other things remaining constant?

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Question 8

The table that follows denotes selected characteristics of absorption costing and/or variable costing. Characteristic Absorption Costing Variable Costing Product cost: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Period cost: Variable selling and administrative cost Fixed selling and administrative cost Fixed manufacturing overhead Income statement disclosure/ andience: Gross margin Contribution margin Lower net income when inventories rise External financial-statement users Required: Evaluate each product-cost, period-cost, and income-statement/disclosure characteristic and determine whether it relates to absorption costing, variable costing, or both methods. Place an "X" in the proper column.

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Question 9

Windsor Corporation began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totalled 22,000 units at $30 each. Actual costs incurred were: fixed manufacturing overhead $150,000; fixed selling and administrative costs $100,000; variable manufacturing cost per unit $8; variable selling and administrative cost per unit $2. If there were no variances, Windsor's absorption-costing net income would be:

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Question 10

Somerset Company is studying the impact of the following: 1. An increase in sales price on the break-even point. 2. A decrease in fixed costs on the contribution margin. 3. An increase in the contribution margin on the break-even point. 4. A decrease in the variable cost per unit on the sales volume needed to achieve Somerset's $68,000 target net profit. 5. An increase in sales commissions on the contribution margin and the break-even point. 6. A decrease in anticipated advertising outlays on fixed cost and the break-even point. Required: Determine the impact of these operating changes (increase, decrease, or no effect) on the item(s) noted.

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Question 11

Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net income?

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Question 12

Mary's Baked Creations supplies boxes of home baked cookies to grocery chains across Ontario. The company's annual fixed costs are $49,000. The sales price of each box of cookies averages $12, and it costs Mary $5 to make and deliver each box. Required: A. How many boxes of cookies must Mary sell in order to break even? B. How many boxes sell to earn a target net profit of $35,000? C. If budgeted sales total 10,000 boxes of cookies, how much is Mary's safety margin? D. Mary's assistant manager, an accounting major, has suggested that the company should try to increase the contribution margin per box. Explain the meaning of "contribution margin" in layman's terms.

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Question 13

Weber Company began operations at the start of the current year, having a production target of 60,000 units. Actual production totalled 60,000 units, and the company sold 95% of its manufacturing output at $50 per unit. The following costs were incurred: Manufacturing: Direct materials used S240,000 Direct labor 480,000 Variable manufacturing overhead 360,000 lixed manufacturing overhead 600,000 Selling and administrative: Variable 180,000 Fixed 630,000 Required: A. Assuming the use of variable costing, compute the cost of Weber's ending finished-goods inventory. B. Compute the company's contribution margin. Would Weber disclose the contribution margin on a variable-costing income statement or an absorption-costing income statement? C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Weber include in the ending finished-goods inventory? D. Compute the company's gross margin.

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Question 14

The difference between budgeted sales revenue and break-even sales revenue is the:

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Question 15

Panda, which began business at the start of 2012, had the following data: Planned and actual production: 100,000 units Sales: 80,000 units at $20 per unit Production costs: Variable $6 per unit; Fixed $300,000 Selling and administrative costs: Variable $1 per unit; Fixed $32,000 The gross margin that Panda Company would disclose on its 2012 absorption-costing income statement is:

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Question 16

Two sisters (Amy and Amanda) aspired to owning and operating companies in the same line of business. Amy believed in maintaining a very large, highly efficient manual labour force; Amanda, on the other hand, favored automated-production processes. One business was located in Brockville, Ontario and the other was located in Minto, New Brunswick. Recent data follow. Brockville Minto Sales \ 3,000,000 \ 3,000,000 Contribution margin 2,800,000 1,500,000 Net income 50,000 50,000 Required: A. Which of the two businesses, Brockville or Minto, has the highest level of (1) variable cost and (2) highest level of fixed cost? Explain your answer. B. Determine the probable owner of the firm located in (1) Brockville and (2) Minto. Briefly explain your answer. C. Compute the operating leverage factor for Brockville and Minto. D. Suppose that both Brockville and Minto had the opportunity to increase sales by 20%. Which of the two locations would experience a larger percentage change in net income? Why?

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Question 17

Thompson Company is considering the development of two products: Product No. 65 or Product No. 66. Manufacturing cost information follows. No. 65 No. 66 Annual lixed costs \ 220,000 \ 340,000 Variable cost per unit 33 25 Regardless of which product is introduced, the anticipated selling price will be $50 and Thompson will pay a 10% sales commission on gross dollar sales. Thompson will not carry an inventory of these items. Required: A. What is the break-even sales volume (in dollars) on product no. 66? B. Which of the two products will be more profitable at a sales level of 25,000 units? C. At what unit-volume level will the profit/loss on Product No. 65 equal the profit/loss on Product No. 66?

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Question 18

Red River Company sells its product for $12,000 per unit. Variable costs per unit are: Manufacturing overhead -$8,000 Selling and administrative -$150 Fixed costs are: Manufacturing overhead -$30,000 Selling and administrative -$40,000 Red River had no beginning inventory at January 1, 2010. Production was 20 units each year in 2010, 2011, and 2012. Sales were 20 units in 2010, 16 units in 2011, and 24 units in 2012. Income/(Loss) under variable costing for 2011 is:

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Question 19

Canyon reported $106,000 of net income for the year by using variable costing. The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there were no variances, net income under absorption costing would be:

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Question 20

Contemporary Corp. sells a single product for $80. Variable costs are 40%% of the selling price, and the company has fixed costs that amount to $500,000. Current sales total 18,000 units. Each unit that Contemporary sells will:

The underlying difference between absorption costing and variable costing lies in the treatment of:

Under throughput costing, the cost of a unit typically includes:

Management may be tempted to overproduce

The break-even point is the volume of activity where:

Which of the following would take place if a company experienced an increase in fixed costs, all other things remaining constant?

Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net income?

The difference between budgeted sales revenue and break-even sales revenue is the:

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Capital Expenditure Decisions

Allocation of Support Activity Costs and Joint Costs

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