Deck 9: Income Effects of Denominator Level on Inventory Valuation

Question 1

Answer the following question(s) using the information below.
A manufacturing firm is able to produce 2,000 pairs of shoes per hour, at maximum efficiency. There are three eight-hour shifts each day. Production is actually 1,600 pairs of shoes per hour due to unavoidable operating interruptions. The plant is expected to run every day but was only able to operate for 27 days in September.

-What is the theoretical capacity for the month of September?

A) 1,488,000 shoes
B) 1,440,000 shoes
C) 1,036,800 shoes
D) 1,296,000 shoes
E) 1,152,000 shoes

Answer 1

1,440,000 shoes

Question 2

Answer the following question(s) using the information below.
A manufacturing firm is able to produce 2,000 pairs of shoes per hour, at maximum efficiency. There are three eight-hour shifts each day. Production is actually 1,600 pairs of shoes per hour due to unavoidable operating interruptions. The plant is expected to run every day but was only able to operate for 27 days in September.

-What is the practical capacity for the month of September?

A) 1,488,000 pairs of shoes
B) 1,440,000 pairs of shoes
C) 1,036,800 pairs of shoes
D) 1,296,000 pairs of shoes
E) 1,152,000 pairs of shoes

Answer 2

1,152,000 pairs of shoes

Question 3

Wallace's Wrench Company manufactures socket wrenches. For next month the vice-president of production plans on producing 4,400 wrenches per day. The company can produce as many as 5,000 wrenches per day, but are more likely to produce 4,500 per day. The demand for wrenches for the next three years is expected to average 4,250 wrenches per day. Fixed manufacturing costs per month total $336,600. The company works 20 days a month due to local zoning restrictions. Fixed manufacturing overhead is charged on a per wrench basis.
Required:
a. What is the theoretical fixed manufacturing overhead rate per wrench?
b. What is the practical fixed manufacturing overhead rate per wrench?
c. What is the normal fixed manufacturing overhead rate per wrench?
d. What is the master-budget fixed manufacturing overhead rate per wrench?

Answer 3

a. Theoretical overhead rate = $336,600/(5,000 × 20) = $3.366
b. Practical overhead rate = $336,600/(4,500 × 20) = $3.74
c. Normal overhead rate = $336,600/(4,250 × 20) = $3.96
d. Master-budget overhead rate = $336,600/(4,400 × 20) = $3.825

Question 4

Sierra Tool Manufacturing Ltd. manufactures hammers at their Hamilton facility. For next month the vice-president of production plans on producing 2,700 hammers per day. The company can produce as many as 4,000 hammers per day, but are more likely to produce 3,500 per day. The demand for wrenches for the next three years is expected to average 3,100 wrenches per day. Fixed manufacturing costs per month total $282,400. The company works 22 days a month due to local zoning restrictions. Fixed manufacturing overhead is charged on a per wrench basis.
Required:
a. What is the theoretical fixed manufacturing overhead rate per wrench?
b. What is the practical fixed manufacturing overhead rate per wrench?
c. What is the normal fixed manufacturing overhead rate per wrench?
d. What is the master-budget fixed manufacturing overhead rate per wrench?

Question 5

Use the information below to answer the following question(s).
Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8 per unit, while direct manufacturing labour averages $1.50 per unit. Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year. Administrative expenses, all fixed, run $90,000 per year, with sales commissions of $2 per part. Production is 100,000 parts per year. And this year, 75,000 boxes were sold.

-What is Honda Heaven's inventory cost per box using variable costing?

A) $9.50
B) $10.00
C) $12.50
D) $13.40
E) $15.40

Question 6

Use the information below to answer the following question(s).
Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8 per unit, while direct manufacturing labour averages $1.50 per unit. Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year. Administrative expenses, all fixed, run $90,000 per year, with sales commissions of $2 per part. Production is 100,000 parts per year. And this year, 75,000 boxes were sold.

-What is Honda Heaven's inventoriable cost per box using absorption costing?

A) $9.50
B) $10.00
C) $12.50
D) $13.40
E) $15.40

Question 7

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo. The supervisor has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs.


There were no beginning or ending inventories of materials or work-in-process.

-What is the per unit variable cost?

A) $22.00
B) $18.00
C) $14.00
D) $12.00
E) $11.00

Question 8

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo. The supervisor has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs.


There were no beginning or ending inventories of materials or work-in-process.

-What would Beauty Supply Company's operating income (loss) be for January and February, respectively, using the variable costing approach?

A) $18,000 and $24,200
B) $(45,000) and $(35,500)
C) $(44,000) and $(33,809)
D) $(42,000) and $(35,800)
E) $(22,000) and $(15,800)

Question 9

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo. The supervisor has provided the following information and stated that standard costing is used for manufacturing, marketing, and administrative costs.


There were no beginning or ending inventories of materials or work-in-process.

-What would Beauty Supply Company's operating income (loss) be for January and February, respectively, using the absorption costing approach?

A) $(22,000) and $(15,800)
B) $(24,750) and $(33,275)
C) $(15,750) and $(21,175)
D) $(24,500) and $(26,050)
E) $18,000 and $24,200

Question 10

Which of the following is correct concerning variable vs absorption costing?

A) Absorption costing income statement classifies fixed costs as period costs.
B) The absorption costing income statement combines costs by cost behaviour.
C) Absorption costing income statements need to differentiate between variable and fixed costs.
D) The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus fixed manufacturing costs in opening inventory.
E) The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus variable manufacturing costs in ending inventory.

Question 11

Use the information below to answer the following question(s).
Western Technologies Inc. produces dashboard displays. Actual fixed manufacturing overhead is the same as the budgeted amount, $687,500. Production in September increased by 10% over the previous month's production. August production was 25,000 displays. The production level is the same as the budgeted denominator level. At the end of September, 2,000 displays remained in stock. In August, all of the displays were sold by the end of the month and there was no remaining work in process inventory.

-What are Western Technologies' appropriate period costs for September if variable costing is used?

A) $668,380
B) $726,500
C) $632,500
D) $687,500
E) $637,500

Question 12

Use the information below to answer the following question(s).
Western Technologies Inc. produces dashboard displays. Actual fixed manufacturing overhead is the same as the budgeted amount, $687,500. Production in September increased by 10% over the previous month's production. August production was 25,000 displays. The production level is the same as the budgeted denominator level. At the end of September, 2,000 displays remained in stock. In August, all of the displays were sold by the end of the month and there was no remaining work in process inventory.

-What is the Western Technologies' September cost of goods sold amount if absorption costing is used?

A) $668,380
B) $726,500
C) $632,500
D) $687,500
E) $637,500

Question 13

For Consumer Lumber what would be the total difference between operating incomes under absorption costing and variable costing?

A) $35,000
B) $25,000
C) $20,000
D) $2,500
E) $1,500

Question 14

One possible means of determining the difference between absorption and variable costing based operating incomes is

A) to add fixed manufacturing cost to the variable costing operating income.
B) by subtracting the variable overhead rate from the fixed overhead rate and then multiplying the difference by the number of units in inventory.
C) by subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory.
D) by multiplying the number of units produced by the budgeted fixed manufacturing overhead rate.
E) by adding fixed manufacturing overhead in beginning inventory to income.

Question 15

The following information pertains to XYZ Corporation:
What is the difference between absorption costing operating income and variable costing operating income?

A) $11,500
B) $20,000
C) $10,000
D) $10,500
E) $9,500

Question 16

Which of the following is TRUE concerning operating income calculated under variable costing as compared to absorption costing?

A) Operating income is lower under variable costing when production exceeds sales.
B) Operating income is higher under variable costing when production exceeds sales.
C) Operating income is lower under variable costing when sales exceeds production only if there is a production-volume variance.
D) operating income is higher under variable costing when production exceeds sales only if there is a production-volume variance.
E) The relationship between production and sales has no bearing on the differences in operating income between the two methods.

Question 17

Use the information below to answer the following question(s).
Balloon Arrangements produces balloon bouquets. The following information has been provided by management:


-What is the total cost per bouquet if absorption costing is used?

A) $5.50
B) $4.75
C) $3.75
D) $2.50
E) $1.98

Question 18

Answer the following question(s) using the information below.
Gabe's Auto produces and sells an auto part for $30.00 per unit. In 2012, 100,000 parts were produced and 75,000 units were sold. Other information for the year includes:


-What is the inventoriable cost per unit using variable costing?

A) $14.25
B) $15.00
C) $18.75
D) $20.10
E) $20.00

Question 19

Answer the following question(s) using the information below.
Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:


-What is cost of goods sold using variable costing?

A) $35,000
B) $40,250
C) $47,250
D) $52,500
E) $78,750

Question 20

Answer the following question(s) using the information below.
Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:


-What is contribution margin using variable costing?

A) $96,250
B) $91,000
C) $84,000
D) $78,750
E) $52,500

Question 21

Answer the following question(s) using the information below.

Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2012. Other information for 2012 includes:
The budgeted denominator level is 1,000 units.
Units produced total 750 units.
Units sold total 600 units.
Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.


-The production-volume variance is

A) $2,000.
B) $900.
C) $2,400.
D) $0.
E) $1,500.

Question 22

Amalgamated Glass and Mirror Inc. had sales of 37,500 units and production of 50,000 units. Other information for the year included:

Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.

Question 23

For the current year, Nichols Inc., had sales of 75,000 units and production of 100,000 units. Other information for the year included:


Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.

Question 24

For the current year, Bonnet Inc., had sales of 42,000 units and production of 50,000 units. Other information for the year included:

Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.

Question 25

Ace Products sells its products for $22 each. Unit manufacturing costs are: direct materials, $4.00; direct manufacturing labour, $6.00; and variable manufacturing overhead, $3.00. Total fixed manufacturing overhead costs are $60,000 and marketing expenses are $2.00 per unit plus $20,000 per year. The current production level is 25,000 units although only 20,000 units are anticipated to be sold.
Required:
a. Prepare an income statement using absorption costing in the gross margin format.
b. Prepare an income statement using variable costing in the contribution margin format.

Question 26

Ewing Company planned to be in operation for three years. During the first year, it had no sales but incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses. In the next year, it sold half of the finished goods inventory from the previous year for $100,000 but it had no manufacturing costs. In the third year, it sold the remainder of the inventory for $120,000, had no manufacturing expenses and went out of business. Marketing and administrative expenses were fixed and totalled $20,000 each year.
Required:
a. Prepare an income statement for each year using absorption costing in the gross margin format.
b. Prepare an income statement for each year using variable costing contribution margin format.

Question 27

Alliance Realty bought a 2,000 acre island for $10,000,000 and divided it into 200 equal size lots. As the lots are sold they are cleared at an average cost of $5,000. Storm drains and driveways are installed at an average cost of $8,000 per site. Sales commissions are 10 percent of selling price. Administrative costs are $850,000 per year. The average selling price was $160,000 per lot during the year when 50 lots were sold.
During the subsequent year, the company bought another 2,000 acre island and developed it exactly the same way. Lot sales in the second year totalled 300 with an average selling price of $160,000. All costs were the same as in the first year.
Required:
Prepare income statements for both years using both absorption and variable costing methods. Use the gross margin format for the absorption method and the contribution margin format for the variable costing method.

Question 28

Johnson and Sons Company was concerned that increased sales did not result in increased profits for 2016. Both variable unit and total fixed manufacturing costs for 2015 and 2016 remained constant at $20 and $2,000,000, respectively.
In 2015 the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no beginning inventory in 2011. In 2016 the company made 70,000 units and sold 90,000 units at a price of $50. Selling and administrative expenses were all fixed at $100,000 each year.
Required:
a. Prepare income statements for each year using absorption costing in the gross margin format.
b. Prepare income statements for each year using variable costing in the contribution margin format.
c. Explain why the income was different each year using the two methods. Show computations.

Question 29

The following data are available for Ruggles Company for the year ended September 30, 2016.

Required:

a. Determine operating income using the variable costing approach.
b. Determine operating income using the absorption costing approach.
c. Explain why the income was different each year using the two methods. Show computations.

Question 30

Stamp Bottling Works manufactures glass bottles. January began with 15,000 units carried at $108,750. An additional 35,000 units were produced that month. February had production of 40,000 units. Fixed manufacturing costs totalled $119,000 in January and $132,000 in February. Sales for both months totalled 45,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.40 per unit variable and $60,000 fixed. The selling price was $10 per unit. Inventory moves on a first-in, first-out basis.
Required:
Compute the operating income for both months using absorption costing.

Question 31

Fresco Bottling Works manufactures glass bottles. January began with 10,000 units carried at $71,500. An additional 55,000 units were produced that month. February had production of 50,000 units. Fixed manufacturing costs totalled $192,500 in January and $180,000 in February. Sales for both months totalled 45,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.35 per unit variable and $70,000 fixed. The selling price was $11 per unit. Inventory moves on a first-in, first-out basis.
Required:
Compute the operating income for both months using absorption costing.

Question 32

Megredy Company prepared the following absorption costing income statement for the year ended May 31, 2016.

Additional information follows:
Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs.
Required:
Prepare a variable-costing income statement for the same period.

Question 33

Normandeau Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 1,500 units produced and 1,250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $1,850.
Required:
Prepare the income statement for Normandeau Corporation for September under variable costing.

Question 34

Finch-Hutton Machine Works Ltd. uses standard costing based on a practical capacity of 1,050 tractor bearings per month. The actual production for the month of January was 980. The standard variable cost per unit is $11 and budgeted monthly fixed manufacturing overhead is $78,750. Actual costs for January were $11,760 and $78,400 for variable and fixed respectively. There was no work-in-process inventory at the beginning or end of January. The finished goods inventory had no balance at the beginning of January; January sales were 900 units at $135 per unit. Non-manufacturing costs totalled $38,000. Variances are pro-rated to inventory and cost of goods sold based on the balances in the accounts before proration.
Required:
1. Prepare an income statement in gross margin format using absorption costing.
2. Determine the balance of the January ending finished goods inventory.
3. Determine the variances in as much detail as possible then prepare the journal entries to clear the variance accounts.

Question 35

You are the management accountant for the West coast division of a musical instrument manufacturing company. There are three manufacturing plants in your division. Each plant manager was given decision making authority in terms of production, as long as income for their plant kept on pace. The manager at Plant A has consistently been the leader in profit for the division, but the other two managers are complaining that Plant A doesn't seem to be selling any more product than they are. The division manager has noticed higher inventory levels at Plant A, which the plant manager justifies by saying the higher levels are needed to ensure adequate sales. The division manager suspects that there could be other reasons, and she has asked you to provide three proposals for revising performance evaluation.

Question 36

The manager of the manufacturing division of Winnipeg Windows does not understand why gross margin went down in February when sales went up. Some of the information she has selected for evaluation include:

The division operated at normal capacity during January. Variable manufacturing cost per unit was $5, and the fixed manufacturing costs were $400,000. Selling and administrative expenses were all fixed.
Required:
Explain why the gross margin in February was lower than January even though February sales were higher. How would variable costing income statements help the manager understand the division's operating income?

Question 37

SamTech Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows:

East Division uses absorption costing and West Division uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Selling and administrative expenses were identical for each division. There were no inventories at the beginning of Year 1.
Required:
Which division reports the highest income each year? Explain.

Question 38

Plate Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 percent of plant capacity. The flatware industry was growing, so increased sales were not out of the question.
I. R. Dumm took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the break-even point during his very first year.
Required:
What do you think Mr. Dumm had in mind for increasing the company's operating income?

Question 39

Answer the following question(s) using the information below.
Reusser Company produces wood statues. Management has provided the following information:


-What is the cost per statue if throughput costing is used?

A) $11.00
B) $9.50
C) $7.50
D) $5.00
E) $6.50

Question 40

Answer the following question(s) using the information below.
Reusser Company produces wood statues. Management has provided the following information:


-What is the total throughput contribution?

A) $720,000
B) $840,000
C) $1,000,000
D) $1,080,000
E) $1,200,000

Question 41

Which of the following is TRUE concerning throughput costing?

A) Throughput contribution is the sum of revenues and direct costs.
B) Throughput contribution is the difference between revenues and direct costs.
C) Throughput contribution is the difference between revenues and variable direct labour.
D) Throughput contribution is the difference between revenues and (variable direct labour + variable direct materials).
E) Throughput contribution is the difference between revenues and variable direct materials costs.

Question 42

Use the information below to answer the following question(s).
Balloon Arrangements produces balloon bouquets. The following information has been provided by management:


-What is the cost per bouquet if throughput costing is used?

A) $5.50
B) $4.75
C) $3.75
D) $2.50
E) $1.98

Question 43

Answer the following question(s) using the information below.
Stober Company produces a specialty item. Management has provided the following information:


-What is the cost per statue if throughput costing is used?

A) $22.00
B) $19.00
C) $15.00
D) $10.00
E) $13.00

Question 44

Answer the following question(s) using the information below.
Stober Company produces a specialty item. Management has provided the following information:


-What is the total throughput contribution?

A) $1,080,000
B) $1,260,000
C) $1,500,000
D) $1,620,000
E) $1,800,000

Question 45

The new plant manager has lots of ideas for change. His bonus is tied directly to plant profit, and last month he had the accounting department change from absorption costing to variable costing, as he heard at a meeting that contribution margin was usually higher than gross margin. This month, he wants to change to throughput costing, in hopes that throughput contribution will be greater than contribution margin. The relevant data are: Sales $150,000; opening inventory $2,500; variable cost of goods manufactured $24,000; ending inventory using variable costing $8,000; variable marketing cost $15,200; and, there are no variable cost variances. The above numbers are the same for throughput costing except as follows: direct materials in goods manufactured $13,200; and, ending inventory $4,400.
Required:
a. Calculate the contribution margin and throughput margin.
b. Does this appear to be a sensible strategy by the plant manager?

Question 46

Calvin Enterprises produces a specialty statue item. The following information has been provided by
management:


Required:
a. What is the cost per statue if absorption costing is used?
b. What is the cost per statue if throughput costing is used?
c. What is the total throughput contribution?

Question 47

Klein Enterprises produces a specialty statue item. The following information has been provided by management:

Required:
a. What is the cost per statue if absorption costing is used?
b. What is the cost per statue if throughput costing is used?
c. What is the total throughput contribution?

Question 48

Answer the following question(s) using the information below.
Ms. Andrea Chadwick, the company president, has heard that there are multiple break-even points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for current year is as follows:


-What are break-even sales in units using variable costing?

A) 5,625 units
B) 6,250 units
C) 11,875 units
D) 12,180 units
E) 10,556 units

Question 49

Answer the following question(s) using the information below.
Ms. Andrea Chadwick, the company president, has heard that there are multiple break-even points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for current year is as follows:


-What are break-even sales in units using absorption costing if the production units are actually 25,000?

A) 5,625 units
B) 6,667 units
C) 7,667 units
D) 8,847 units
E) 1,154 units

Question 50

Answer the following question(s) using the information below.
The following information pertains to the Bean Company:


-What is the variable costing break-even point in units?

A) 1,000 units
B) 5,556 units
C) 4,445 units
D) 6,000 units
E) 445 units

Question 51

Sutton Hot Dog Stands sells hot dogs at ballparks across Canada for $1.35. Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales average 400,000 units per month, with planned production of 400,000 hot dogs.
Required:
a. What are break-even unit sales under variable costing?
b. What are break-even unit sales under absorption costing if she sells everything she prepares?
c. What are break-even unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000?

Question 52

Jamie's Hot Dog Stands sells hot dogs at ballparks across Canada for $1.55. Variable costs are $1.15 per unit with fixed production costs of $80,000 per month at a level of 320,000 units. Fixed administrative costs total $25,000. Sales average 320,000 units per month, with planned production of 320,000 hot dogs.
Required:
a. What are break-even unit sales under variable costing?
b. What are break-even unit sales under absorption costing if she sells everything she prepares?
c. What are break-even unit sales under absorption costing if average sales are 399,000 and planned production is changed to 400,000?