Costing Systems & Decision Making MCQ examples Flashcards
Fact Pattern: The data below pertain to two types of products manufactured by Cobb Corp. Fixed costs total $300,000 annually. The expected mix in units is 60% for product Y and 40% for product Z.
Per Unit Variable Costs
Sales Price
Product Y $120 $ 70
Product Z 500 200
How much is Cobb’s breakeven point in units?
A. 2,459
B. 857
C. 2,000
D. 1,111
C. 2,000
The BEP in units is equal to fixed costs divided by the unit contribution margin (UCM). The weighted-average UCM is $150, calculated as follows:
Product Y Product Z Sales price $120 $500 Minus: Variable costs (70) (200) Contribution margin $ 50 $300 Times: Mix ratio × 60% × 40% Weighted contribution margin $ 30 $120
The BEP is 2,000 units ($300,000 fixed costs ÷ $150 UCM).
Kew Co. had 3,000 units in work-in-process at April 1 that were 60% complete as to conversion cost. During April, 10,000 units were completed. At April 30, the 4,000 units in work-in-process were 40% complete as to conversion cost. Direct materials are added at the beginning of the process. How many units were started during April?
A. 9,800
B. 9,000
C. 11,000
D. 10,000
C. 11,000
The following physical flow formula may be used to calculate the unknown:
BWIP + Units started = Units completed + EWIP
3,000 + Units started = 10,000 + 4,000
Units started = 11,000
Fact Pattern: The data below pertain to two types of products manufactured by Cobb Corp. Fixed costs total $300,000 annually. The expected mix in units is 60% for product Y and 40% for product Z.
Per Unit Variable Costs
Sales Price
Product Y $120 $ 70
Product Z 500 200
How much is Cobb’s breakeven point in dollars?
A. $300,000
B. $544,000
C. $420,000
D. $400,000
B. $544,000
The BEP in units is equal to fixed costs divided by the unit contribution margin (UCM). The weighted-average UCM is $150, calculated as follows:
Product Y Product Z Sales price $120 $500 Minus: Variable costs (70) (200) Contribution margin $ 50 $300 Times: Mix ratio × 60% × 40% Weighted contribution margin $ 30 $120
The BEP in units is 2,000 units ($300,000 fixed costs ÷ $150 UCM). The revenue (sales) mix will include 1,200 units of Y (2,000 × 60%) and 800 units of Z (2,000 × 40%). Thus, the BEP in dollars will be $544,000 [(1,200 × $120) + (800 × $500)].
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore extraction operations. The following information pertains to work-in-process inventories and operations for the month of May:
Completion %
Units Materials Conversion WIP on May 1 32,000 60% 20% Started in production 200,000 Completed production 184,000 WIP on May 31 48,000 90% 40%
Costs for the month were as follows:
BWIP Incurred in May
Materials $54,560 $ 468,000
Direct labor 20,320 182,880
Manufacturing overhead 15,240 391,160
$90,120 $1,042,040
Under the weighted-average method, Albany Mining’s equivalent-unit conversion cost for May is
A. $3.00
B. $3.31
C. $3.10
D. $2.92
A. $3.00
The weighted-average method averages the work performed in the prior period with the work done in the current period.
Conversion Units transferred out 184,000 Add: EWIP (48,000 × 40%) 19,200 EUP 203,200
The conversion costs in BWIP are combined with the conversion costs incurred during the current period. The EUP conversion cost is therefore $3.00 [($20,320 DL in BWIP + $15,240 MOH in BWIP + $182,880 DL in May + $391,160 MOH in May) ÷ 203,200].
Fact Pattern: MultiFrame Company has the following revenue and cost budgets for the two products it sells:
Plastic Glass
Frames Frames
Sales price $10.00 $15.00
Direct materials (2.00) (3.00)
Direct labor (3.00) (5.00)
Budgeted unit sales 100,000 300,000
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit.
The total number of units MultiFrame needs to produce and sell to break even is
A. 300,000 units.
B. 150,000 units.
Answer (B) is correct.
C. 195,000 units.
D. 139,286 units.
B. 150,000 units.
The multi-product breakeven point (BEP) in units can be calculated as follows:
Plastic frames: UCM = $10 – $2 – $3 = $5
Glass frames: UCM = $15 – $3 – $5 = $7
Sales mix:
Plastic frames: 100,000 ÷ (100,000 + 300,000) = 25%
Glass frames: 300,000 ÷ (100,000 + 300,000) = 75%
Weighted-average UCM = ($5 × 25%) + ($7 × 75%) = $6.50
Multi-product BEP = Total fixed costs ÷ Weighted-average UCM
= $975,000 ÷ $6.50
= 150,000 total units
Fact Pattern: Catfur Company has fixed costs of $300,000. It produces two products, X and Y. Product X has a variable cost percentage equal to 60% of its $10 per unit selling price. Product Y has a variable cost percentage equal to 70% of its $30 selling price. For the past several years, unit sales of Product X were 40% of total unit sales. That ratio is not expected to change.
What is Catfur’s breakeven point in dollars?
A. $942,857
B. $750,000
C. $300,000
D. $857,142
A. $942,857
Weighted-average UCM equals $7 {[$10 – ($10 × 60%)] × 40%} + {[$30 – ($30 × 70%)] × 60%}. Weighted-average selling price equals $22 [($10 × 40%) + ($30 × 60%)]. The weighted-average CMR therefore equals 0.3181818 ($7 ÷ $22), and the breakeven point in sales dollars equals $942,857 ($300,000 ÷ 0.3181818).
Fact Pattern: Hamilton Company uses job-order costing. Manufacturing overhead is applied to production at a predetermined rate of 150% of direct labor cost. Any over- or underapplied overhead is closed to the cost of goods sold account at the end of each month. Additional information is available as follows:
Job 101 was the only job in process at January 31, with accumulated costs as follows:
Direct materials $4,000
Direct labor 2,000
Applied manufacturing overhead 3,000
Total manufacturing costs $9,000
Jobs 102, 103, and 104 were started during February.
Direct materials requisitions for February totaled $26,000.
Direct labor cost of $20,000 was incurred for February.
Actual manufacturing overhead was $32,000 for February.
The only job still in process on February 28 was Job 104, with costs of $2,800 for direct materials and $1,800 for direct labor.
Over- or underapplied manufacturing overhead should be closed to the cost of goods sold account at February 28 in the amount of
A. $1,700 underapplied.
B. $2,000 underapplied.
C. $700 overapplied.
D. $1,000 overapplied.
B. $2,000 underapplied.
The amount of over- or underapplied overhead is the difference between the actual overhead incurred and the overhead applied. The amount of overhead applied was $30,000 ($20,000 DL cost ×150%). The amount of overhead incurred was $32,000. Consequently, underapplied overhead of $2,000 ($32,000 actual – $30,000 applied) should be closed to COGS.
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. $50,000
C. $168,000
D. $150,000
B. $50,000
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 ÷ Contribution 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).
Fact Pattern: Catfur Company has fixed costs of $300,000. It produces two products, X and Y. Product X has a variable cost percentage equal to 60% of its $10 per unit selling price. Product Y has a variable cost percentage equal to 70% of its $30 selling price. For the past several years, unit sales of Product X were 40% of total unit sales. That ratio is not expected to change.
How many units of Product Y will Catfur sell at the breakeven point?
A. 8,571 units.
B. 25,714 units.
C. 23,377 units.
D. 20,454 units.
B. 25,714 units.
Weighted-average UCM equals $7 {[$10 – ($10 × 60%)] × 40%} + {[$30 – ($30 × 70%)] × 60%}. The breakeven point for both products is therefore 42,857 units of which 60%, or 25,714 ($42,857 × 60%), are units of Product Y.
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore extraction operations. The following information pertains to work-in-process inventories and operations for the month of May:
Completion %
Units Materials Conversion WIP on May 1 32,000 60% 20% Started in production 200,000 Completed production 184,000 WIP on May 31 48,000 90% 40%
Costs for the month were as follows:
BWIP Incurred in May
Materials $54,560 $ 468,000
Direct labor 20,320 182,880
Manufacturing overhead 15,240 391,160
$90,120 $1,042,040
Under the FIFO method, Albany Mining’s cost per equivalent unit for materials is
A. $2.25
B. $2.51
C. $2.30
D. $2.06
A. $2.25
Under the FIFO method, EUP are determined based only on work performed during the current period. Thus, units in beginning work-in-process must be excluded.
Materials Units transferred out 184,000 Add: EWIP (48,000 × 90%) 43,200 Total completed units 227,200 Minus: BWIP (32,000 × 60%) (19,200) EUP 208,000
Total materials costs incurred for the month of $468,000 spread over 208,000 EUP results in a per-unit cost of $2.25.
Fact Pattern: Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $ 2,000
Materials handling
(20% of direct materials cost) 400
Direct labor 16,000
Manufacturing overhead
(150% of direct labor) 24,000
Total manufacturing cost $42,400
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000.
If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would
A. Increase $3,600.
B. Decrease $6,400.
C. Decrease $12,400.
D. Increase $9,600.
D. Increase $9,600.
The out-of-pocket cost of making the part equals the total manufacturing cost minus the fixed overhead, or $26,400 {$42,400 – [(2 ÷ 3) × $24,000]}. The cost of the component consists of the $30,000 purchase price plus the $6,000 (20% of cost) of variable receiving costs, or a total of $36,000. Thus, unit out-of-pocket cost would increase by $9,600 if the components were purchased.
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 increase, and operating income decreases.
B. Total fixed costs do not change, and operating income does not change.
C. Total fixed costs increase, and operating income increases.
D. Total fixed costs do not change, and operating income increases.
D. Total fixed costs do not change, and operating income increases.
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.
The following data pertain to a company’s cracking-department operations in December:
Units Completion Work-in-process, Dec. 1 20,000 50% Units started 170,000 Units completed and transferred to the distilling department 180,000 Work-in-process, Dec. 31 10,000 50%
Materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process. Assuming use of the FIFO method of process costing, the equivalent units of production (EUP) with respect to conversion performed during December were
A. 170,000
B. 180,000
C. 175,000
D. 185,000
C. 175,000
Under the FIFO method, EUP are determined based only on work performed during the current period. Thus, units in beginning work-in-process must be excluded.
Conversion Units transferred out 180,000 Add: EWIP (10,000 × 50%) 5,000 Total completed units 185,000 Less: BWIP (20,000 × 50%) (10,000)
Equivalent units of production 175,000
Fact Pattern: Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.
Direct materials $ 1,000
Materials handling
(20% of direct materials cost) 200
Direct labor 8,000
Manufacturing overhead
(150% of direct labor) 12,000
Total manufacturing cost $21,200
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part Number KJ37 at a unit price of $15,000.
Assume Leland Manufacturing is able to rent all idle capacity for $25,000 per month. If Leland decides to purchase the 10 units from Scott Supply, Leland’s monthly cost for KJ37 would
A. Increase $23,000.
B. Change by some amount other than those given.
C. Increase $48,000.
D. Decrease $7,000.
A. Increase $23,000.
In addition to the $15,000 purchase price, $8,000 per unit of unavoidable (fixed) manufacturing overhead is incurred (2/3 of $12,000). The materials handling charge of 20% of the purchase price of components adds another $3,000 per unit ($15,000 × .2). Thus, the unit cost of purchase is $26,000 ($15,000 + $8,000 + $3,000). Purchasing increases unit cost by $4,800 ($26,000 cost to purchase – $21,200 cost to manufacture), an increase of $48,000 per month (10 units × $4,800). However, the $25,000 of rental income reduces the increase in net costs to $23,000 per month.
In a traditional job-order cost system, the issuance of indirect materials to a production department increases
A. Factory overhead applied.
B. Work-in-process control.
C. Factory overhead control.
D. Stores control.
C. Factory overhead control.
As overhead is incurred, factory overhead control is debited and accounts payable, supplies, etc., are credited. When overhead is applied, work-in-process is debited and factory overhead applied is credited. The difference between the debited and credited amounts is over- or underapplied overhead.
Rodder, Inc., manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows:
Selling price $15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing overhead cost 2
Fixed selling and administration cost 1
The company received a special one-time order for 1,000 components. Rodder has an alternative use for production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component?
A. $9
B. $12
C. $14
D. $24
C. $14
The entity should apply relevant costing and contribution margin (Revenue – Variable cost) analysis. It presumably has two uses for the production capacity needed to make 1,000 components: (1) the special order or (2) an alternative with a unit contribution margin (UCM) of $5 ($5,000 CM ÷ 1,000 units). The fixed costs are not relevant to the choice between the two uses because they will be incurred in either case. Thus, the relevant cost is the unit variable cost ($3 DM + $3 DL + $3 VOH = $9). The unit price at which the entity will be indifferent between the two uses is therefore $14 ($9 unit variable cost + $5 UCM for the alternative to the special order).
A company is reviewing its financial forecast. The selling price of the company’s product is $22.50, the per unit contribution margin is $12.50, and total fixed costs are $175,000. How many units of the product must be sold to generate $50,000 of profit?
A. 17,500
B. 14,000
C. 18,000
D. 22,500
C. 18,000
The company must sell enough units to cover fixed costs and generate the target profit (i.e., breakeven units plus units required to generate target profit). The number of units is calculated as follows: [(Fixed costs + Target profit) ÷ Unit contribution margin]. The company has fixed costs of $175,000, a target profit of $50,000, and a unit contribution margin of $12.50. Thus, the company must sell 18,000 units [($175,000 + $50,000) ÷ $12.50].
At the breakeven point, the contribution margin equals total
A. Selling and administrative costs.
B. Fixed costs.
C. Variable costs.
D. Sales revenues.
B. Fixed costs.
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).
A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:
The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company’s monthly costs change?
A. Decrease $15,000.
B. Increase $10,000.
C. Decrease $10,000.
D. Increase $5,000.
D. Increase $5,000.
If the company were to purchase the part instead of making it, it would save both direct materials ($40,000) and direct labor ($30,000) costs. However, it would still incur the fixed plant facility cost ($20,000) in addition to the purchase price of the parts themselves (10,000 units × $8 purchase price = $80,000). This total can be reduced by the $5,000 income the company would earn by renting its idle capacity. Therefore, the total cost to purchase the component is $95,000 ($20,000 + $80,000 – $5,000). The total cost of manufacturing in-house is $90,000 ($40,000 direct materials + $30,000 direct labor + $20,000 fixed plant facility cost). If the company purchases the part from outside, its monthly costs will therefore increase by $5,000 ($95,000 to purchase – $90,000 to produce).
A company plans to sell 12,000 units of product XT and 8,000 units of product RP. The company has a capacity of 12,000 productive machine hours. The unit cost structure and machine hours required for each product are as follows:
The company can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the following actions should be recommended to the company’s management?
A. Produce both XT and RP.
B. Purchase both XT and RP.
C. Produce RP internally and purchase XT.
D. Produce XT internally and purchase RP.
D. Produce XT internally and purchase RP.
Relevant unit cost to product XT is $55 ($37 + $12 + $6) and cost for RP is $40 ($24 + $13 + $3). Only enough machine hours are available to produce one product or the other (XT: 12,000 × 1.0 hour per unit = 12,000 hours, RP: 8,000 units × 1.5 hours per unit = 12,000 hours). Cost to produce XT in-house would be $660,000 (12,000 × $55) and cost to produce RP would be $480,000 (12,000 × $40). Cost to purchase XT from outside would be $720,000 (12,000 × $60) and cost to purchase RP would be $360,000 (8,000 × $45). The possible combination with the lowest cost is to produce XT and purchase RP ($660,000 + $360,000 = $1,020,000).
The following information pertains to Sisk Co.:
Sisk’s breakeven point in number of units is
A. 9,286
B. 5,000
C. 4,924
D. 6,250
B. 5,000
The breakeven point in units equals the fixed costs divided by the unit contribution margin (UCM). The fixed costs are $65,000 ($35,000 manufacturing overhead + $30,000 SG&A). The UCM is calculated as follows:
Fact Pattern:
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given in the next column:
Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall mirrors would be
A. $500
B. $1,500
C. $2,500
D. $1,000
A. $500
An activity-based costing (ABC) system allocates overhead costs on the basis of some causal relationship between the incurrence of cost and activities. Because the moves for wall mirrors constitute 25% (5 ÷ 20) of total moves, the mirrors should absorb 25% of the total materials handling costs. Thus, $12,500 ($50,000 × 25%) is allocated to mirrors. The remaining $37,500 is allocated to specialty windows. Dividing the $12,500 by 25 units produces a cost of $500 per unit of mirrors.
What is the normal effect on the numbers of cost pools and cost assignment bases when an activity-based cost (ABC) system replaces a traditional cost system?
A. Increase Increase
At annual sales of $900,000, the Ebo product has the following unit sales price and costs:
What is Ebo’s breakeven point in units?
A. 25,000
B. 31,500
C. 45,000
D. 37,500
D. 37,500
The breakeven point in units is equal to the fixed costs divided by the unit contribution margin (UCM). The number of units sold was 45,000 ($900,000 revenues ÷ $20 unit sales price). Total fixed costs were thus $450,000 [(45,000 units × ($7 FOH + $3 FS&A)]. The UCM equals unit sales price minus unit variable cost ($20 – $6 – $1 – $1 = $12). Thus, the breakeven point in units is 37,500 ($450,000 fixed costs ÷ $12 UCM).
A company uses weighted-average process costing for the product it manufactures. All direct materials are added at the beginning of production, and conversion costs are applied evenly during production. The following data apply to the past month:
Assuming no spoilage, equivalent units of production (EUP) with respect to conversion costs total
A. 8,330
B. 8,780
C. 9,230
D. 9,700
B. 8,780
The weighted-average method averages the work performed in the prior period with the work done in the current period. Thus, beginning work-in-process is left in the calculation (unlike FIFO).
A company employs a process cost system using the first-in, first-out (FIFO) method. The product passes through both Department 1 and Department 2 in order to be completed. Units enter Department 2 upon completion in Department 1. Additional direct materials are added in Department 2 when the units have reached the 25% stage of completion with respect to conversion costs. Conversion costs are added proportionally in Department 2. The production activity in Department 2 for the current month was as follows:
How many equivalent units for direct materials were added in Department 2 for the current month?
A. 70,000 units.
B. 85,000 units.
C. 80,000 units.
D. 90,000 units.
A. 70,000 units.
Beginning inventory is 40% complete. Thus, direct materials have already been added. Ending inventory has not reached the 25% stage of completion, so direct materials have not yet been added to these units. Thus, the EUP for direct materials calculated on a FIFO basis are equal to the units started and completed in the current period (85,000 units completed – 15,000 units in BWIP = 70,000 units started and completed).
A company uses process costing to assign product costs. Available inventory information for a period is as follows:
The ending inventory was 25% complete as to the conversion cost. At the beginning of the process, 100% of direct material was added. What was the total cost transferred out?
A. $130,500
B. $126,973
C. $121,500
D. $117,450
C. $121,500
Total EUP for materials equal 15,000 because 100% of materials are added at the beginning of the process. The materials cost per EUP is $5 ($75,000 materials cost ÷ 15,000 equivalent units). Total EUP for conversion costs equal 13,875 [13,500 physical units completed + (1,500 physical units in ending inventory × 25%)]. The conversion cost is $4 per unit ($55,500 conversion cost ÷ 13,875 equivalent units). Thus, the total cost transferred out is $121,500 [13,500 physical units × ($5 + $4)].
A firm that specializes in chocolate baked goods has long assessed the profitability of a product line by comparing revenues to the cost of goods sold. However, the firm’s new accountant wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost information relating to two of the firm’s major products.
Using activity-based costing, which one of the following statements is true?
A. The muffins are $1,925 more profitable.
B. The cheesecakes are $75 more profitable.
C. The muffins are $2,000 more profitable.
D. The muffins have a higher profitability as a percentage of sales and therefore are more advantageous.
A. The muffins are $1,925 more profitable.
The first step is to calculate the gross margin on the two products:
Fact Pattern: Stewart Industries has been producing two bearings, components B12 and B18, for use in production.
Stewart’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart’s management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).
Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.
The net benefit (loss) per machine hour that would result if Stewart accepts the supplier’s offer of $13.50 per unit for Component B18 is
A. $(1.00)
B. $(1.75)
C. $.50
D. Some amount other than those given.
A. $(1.00)
The variable costs of producing B18 total $10.50 ($3.75 + $4.50 + $2.25). Thus, purchasing at $13.50 would result in a loss of $3 per bearing. Given that each bearing requires 3 hours of machine time, the loss is $1 per machine hour.
A 20% target contribution margin is set for Duct, which is a new product with the following unit costs:
What is Duct’s target selling price?
A. $25.00
B. $33.60
C. $18.00
D. $18.75
D. $18.75
The contribution margin (CM) is equal to sales revenue minus variable costs. Furthermore, the contribution margin ratio (CMR) is equal to the CM divided by sales revenue. Duct’s variable costs total $15 ($12 manufacturing + $3 selling and admin.) and the target CMR is 20%, thus the following equations can be derived:
CM = X - $15
20% = CM / X
where X is equal to sales revenue per unit.
Because the CM is used in both formulas, the CMR formula can be rearranged to 20% = (X – $15) ÷ X. Solving for X results in a target selling price of $18.75.
Fact Pattern: Stewart Industries has been producing two bearings, components B12 and B18, for use in production.
Stewart’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart’s management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).
Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.
Stewart will maximize its net benefits by
A. Purchasing 11,000 units of B18 and manufacturing 8,000 units of B12.
B. Purchasing 4,800 units of B12 and manufacturing the remaining bearings.
C. Purchasing 4,000 units of B18 and manufacturing the remaining bearings.
D. Purchasing 8,000 units of B12 and manufacturing 11,000 units of B18.
C. Purchasing 4,000 units of B18 and manufacturing the remaining bearings.
Purchasing will increase the company’s costs by $3 ($11.25 – $2.25 – $4 – $2) for each B12 bearing, or $1.20 per hour ($3 ÷ 2.5 hrs). Buying B18 will only cost the company an additional $1 per machine hour [($13.50 – $3.75 – $4.50 – $2.25) ÷ 3 machine hours]. Thus, the company should make all the needed B12s and compensate for the machine hours constraint by purchasing B18s. Given that each unit of B12 requires 2.5 hours of machine time, the needed 8,000 units can be produced in 20,000 hours (2.5 × 8,000). The remaining 21,000 hours (41,000 – 20,000) then can be used for the production of 7,000 B18s (21,000 ÷ 3 hrs.). Because the annual requirement of B18s is 11,000 units, the other 4,000 units must be purchased.
A company uses a process costing system to record inventory costs. Data at the end of the month are as follows:
The company uses the weighted-average method to compute the costs. Its total costs for the month are $10,000 for direct materials and $19,600 for conversion costs. What is the total conversion cost per equivalent unit?
A. $24.50
B. $19.60
C. $30.00
D. $20.00
D. $20.00
Under the weighted-average method, units in beginning work-in-process (WIP) are treated the same as units started and completed during the current period. However, in this question, the company has no beginning WIP. EUP are calculated by the sum of total units completed and transferred out in the current period plus the proportion of completed ending WIP (Ending WIP × Percent completed). Thus, EUP of conversion costs is 980 [900 + (100 × 80%)]. The cost per EUP under the weighted-average method is calculated as beginning WIP costs plus current-period costs divided by EUP. Because conversion costs totaled $19,600 for the month, and no beginning WIP existed, conversion costs per EUP is $20 ($19,600 current period costs ÷ 980 EUP).
Mason Co. uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of direct-labor dollars. This rate was calculated last year and will be used throughout the current year. Mason had one job, No. 150, in process at the beginning of the month with raw materials costs of $2,000 and direct-labor costs of $3,000. During the month, raw materials and direct labor added to jobs were as follows:
Actual manufacturing overhead for the month was $20,000. During the month, Mason completed Job Nos. 150 and 151. For the month, manufacturing overhead was
A. Overapplied by $4,000.
B. Underapplied by $7,000.
C. Underapplied by $2,000.
D. Underapplied by $1,000.
C. Underapplied by $2,000.
Mason incurred direct-labor costs of $9,000 ($1,500 Job 150 + $5,000 Job 151 + $2,500 Job 152). Thus, overhead applied was $18,000 ($9,000 × 200%). The amount underapplied was $2,000 ($20,000 actual OH – $18,000).
A company currently manufactures all component parts used in the manufacture of various hand tools. A handle is used in three different tools. The unit cost budget for 20,000 handles is
A parts manufacturer has offered to supply 20,000 handles to the company for $1.25 each, delivered. If the company currently has idle capacity that cannot be used, accepting the offer will
A. Decrease the handle unit cost by $.05.
B. Increase the handle unit cost by $.05.
C. Decrease the handle unit cost by $.15.
D. Increase the handle unit cost by $.15.
D. Increase the handle unit cost by $.15.
Because the fixed cost will be incurred whether the company makes or buys the part, the relevant unit cost of making the part is the $1.10 variable cost ($1.30 – $.20 fixed overhead). The existence of idle capacity indicates that the firm has no opportunity cost to be considered in the calculation. Thus, accepting the offer would increase costs by $.15 ($1.25 – $1.10) per unit.
