Midterm Managerial Flashcards
Test
Of the following groups, which is the primary user of managerial accounting information?
Managers
Which of the following functions of management involves comparing actual results with budgeted results?
control
Which of the following is the correct sequencing of the functions within the managerial cycle?
Plan - Implement - Control
An opportunity cost is:
the foregone benefit of the path not taken.
An out-of-pocket cost involves which of the following?
An actual outlay of cash.
Costs that can be traced to a specific cost object are:
direct costs
What determines the difference between a direct and an indirect cost?
Whether it can be traced to a specific cost object.
Variable costs are:
costs that change, in total, in direct proportion to changes in activity levels.
A cost is $50,000 when 25,000 units are produced, and $50,000 when 50,000 units are produced. This is an example of a(n):
fixed cost
What determines the difference between a variable and a fixed cost?
Whether the total cost changes when activity levels change.
For a cost to be relevant, it must:
differ between decision alternatives.
Prime costs are defined as:
direct labor plus direct materials.
Nonmanufacturing costs are generally classified into what two groups?
Marketing costs and administrative costs
Robin Company has the following balances for the current month:
Direct materials used $ 24,000 Direct labor $ 36,800 Sales salaries $ 19,200 Indirect labor $ 4,800 Production manager's salary $ 9,600 Marketing costs $ 14,400 Factory lease $ 6,400
What is Robin’s total manufacturing overhead?
$20,800 = $4,800 + $9,600 + $6,400. Manufacturing overhead includes the costs of indirect labor, the production manager’s salary, and the factory lease, which total $20,800.
Product costs are sometimes called:
inventoriable costs.
When are period costs counted as inventory?
Never
A predetermined overhead rate is calculated by dividing:
estimated manufacturing overhead cost by estimated total cost driver.
Manufacturing overhead is applied to each job using which formula?
Predetermined overhead rate × actual value of the cost driver for the job
Manufacturing overhead was estimated to be $400,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $415,000, actual labor hours were 21,000. The amount of manufacturing overhead applied to production would be:
Calculate the predetermined overhead rate of $20.00 per direct labor hour by dividing total estimated manufacturing overhead by the estimated total cost driver for the year. ($400,000/20,000 = $20.00) Apply manufacturing overhead at the predetermined rate, multiplied by the actual direct labor hours. ($20.00 × 21,000 = $420,000)
Manufacturing overhead was estimated to be $200,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $215,000, and actual labor hours were 21,000. The predetermined overhead rate per direct labor hour would be:
$200,000/20,000 = $10.00 Divide total estimated manufacturing overhead by the estimated total cost driver for the year to calculate the predetermined manufacturing overhead rate.
Manufacturing overhead was estimated to be $500,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $450,000, and actual direct labor hours were 19,000. The predetermined overhead rate per direct labor hour would be:
$500,000/20,000 = $25.00 Divide total estimated manufacturing overhead by the estimated total cost driver for the year to calculate the predetermined manufacturing overhead rate.
Manufacturing overhead was estimated to be $500,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $450,000, and actual direct labor hours were 19,000. The amount of manufacturing overhead applied to production would be:
Calculate the predetermined overhead rate of $25.00 by dividing total estimated manufacturing overhead by the estimated total cost driver for the year. ($500,000/20,000 = $25.00) Multiply the predetermined manufacturing overhead rate ($25.00) to the actual number of direct labor hours (19,000) to calculate applied manufacturing overhead. ($25.00 × 19,000 = $475,000)
Kilt Company had the following information for the year:
Direct materials used $ 110,000
Direct labor incurred (5,000 hours) $ 150,000
Actual manufacturing overhead incurred $ 166,000
Kilt Company used a predetermined overhead rate of $42.00 per direct labor hour for the year and estimated that direct labor hours would total 5,500 hours. Assume the only inventory balance is an ending Work in Process balance of $17,000. How much overhead was applied during the year?
$42.00 × 5,000 = $210,000 Multiply the predetermined overhead rate ($42.00) times the actual number of direct labor hours incurred (5,000).
Which of the following represents the accumulated costs of incomplete jobs?
Work in Process Inventory
Which of the following represents the cost of jobs completed but not yet sold?
Finished Goods Inventory
When units are completed, the cost associated with the job is credited to which account?
When a job is completed, its cost is transferred from Work in Process Inventory (with a credit) to Finished Goods Inventory (with a debit).
When materials are placed into production:
Work in Process Inventory is debited if the materials are traced directly to the job.
Which of the following would be used to record the property taxes on a factory building?
MANOH
- Actual indirect manufacturing costs, including property taxes on a factory, are accumulated in the Manufacturing Overhead account on the debit side of the account.
Manufacturing overhead was estimated to be $200,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $215,000, and actual labor hours were 21,000. The amount debited to the Manufacturing Overhead account would be:
Actual manufacturing overhead costs of $215,000 are accumulated on the debit side of the Manufacturing Overhead account.
Manufacturing overhead was estimated to be $250,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $225,000, and actual direct labor hours were 19,000. The amount credited to the Manufacturing Overhead account would be:
The applied overhead would be credited to the Manufacturing Overhead account. First, calculate the predetermined overhead rate by dividing total estimated manufacturing overhead by total estimated direct labor hours. ($250,000/20,000 = $12.50) Then apply manufacturing overhead by multiplying the predetermined overhead rate by the actual direct labor hours. ($12.50 × 19,000 = $237,500) Credit the amount to Manufacturing Overhead.
The most common method for disposing of over or underapplied overhead is to:
The most common method for disposing of the balance in Manufacturing Overhead is to make a direct adjustment to Cost of Goods Sold.
Underapplied overhead means:
If overhead is underapplied, there is a debit balance in the overhead account.
Manufacturing overhead was estimated to be $200,000 for the year along with 20,000 direct labor hours. Actual manufacturing overhead was $215,000, and actual labor hours were 21,000. To dispose of the balance in the Manufacturing Overhead account, which of the following would be correct?
Calculate the predetermined overhead rate by dividing the estimated total manufacturing overhead by the estimated direct labor hours. ($200,000/20,000 = $10.00) Apply manufacturing overhead by multiplying the predetermined overhead rate by the actual direct labor hours. ($10.00 × 21,000 = $210,000) Since applied overhead ($210,000) on the credit side of the manufacturing overhead account is less than actual overhead ($215,000) on the debit side of the manufacturing overhead account, overhead is underapplied. ($215,000 - $210,000 = $5,000) which means is has a debit balance. To correct this, credit the $5,000 to Manufacturing Overhead and debit cost of goods sold.
Ragtime Company had the following information for the year:
Direct materials used $ 110,000
Direct labor incurred (5,000 hours) $ 150,000
Actual manufacturing overhead incurred $ 166,000
Ragtime Company used a predetermined overhead rate of $35 per direct labor hour for the year. Assume the only inventory balance is an ending Work in Process Inventory balance of $17,000. What was cost of goods manufactured?
Cost of goods manufactured is the sum of direct materials, direct labor, and applied (not actual) manufacturing overhead, plus the beginning Work in Process balance, less the ending Work in Process balance. Applied manufacturing overhead is calculated by multiplying the predetermined overhead rate by the number of direct labor hours. ($35 × 5,000 = $175,000) Thus, cost of goods manufactured is $418,000, calculated as: $110,000 + $150,000 + $175,000 + $0 - $17,000 = $418,000.
Sawyer Company had the following information for the year:
Direct materials used $ 190,000
Direct labor incurred (7,000 hours) $ 245,000
Actual manufacturing overhead incurred $ 273,000
Sawyer Company used a predetermined overhead rate using estimated overhead of $320,000 and 8,000 estimated direct labor hours. Assume the only inventory balance is an ending Finished Goods Inventory balance of $9,000. What was adjusted cost of goods sold?
The predetermined overhead rate is $40. ($320,000/8,000 = $40) Applied manufacturing overhead = $40 × 7,000 = $280,000. Cost of goods manufactured = $190,000 + $245,000 + $280,000 + $0 - $0 = $715,000. Overapplied overhead = $280,000 - $273,000 = $7,000. Unadjusted cost of goods sold = $0 + $715,000 - $9,000 = $706,000. Adjusted cost of goods sold = $706,000 - $7,000 = $699,000.
McGown Corp. has the following information:
Beginning Inventory (1/1) Ending Inventory (12/31)
Raw Materials Inventory $ 20,000 $ 30,000
Work in Process Inventory $ 15,000 $ 18,000
Finished Goods Inventory $ 30,000 $ 20,000
Additional information for the year is as follows:
Raw materials purchases $ 100,000
Direct labor $ 75,000
Manufacturing overhead applied $ 80,000
Indirect materials $ 0
Compute the direct materials used in production.
Calculate direct materials used by adding raw materials purchased to beginning inventory and subtracting indirect materials and ending raw materials inventory. Direct materials used = $20,000 + $100,000 - $0 - $30,000 = $90,000.
McGown Corp. has the following information:
Beginning Inventory (1/1) Ending Inventory (12/31)
Raw Materials Inventory $ 20,000 $ 30,000
Work in Process Inventory $ 15,000 $ 18,000
Finished Goods Inventory $ 30,000 $ 20,000
Additional information for the year is as follows:
Raw materials purchases $ 100,000
Direct labor $ 75,000
Manufacturing overhead applied $ 80,000
Indirect materials $ 0
Compute the current manufacturing costs.
Direct materials used = $20,000 + $100,000 - $0 - $30,000 = $90,000. Current manufacturing costs = $90,000 + $75,000 + $80,000 = $245,000.
McGown Corp. has the following information:
Beginning Inventory (1/1) Ending Inventory (12/31)
Raw Materials Inventory $ 20,000 $ 30,000
Work in Process Inventory $ 15,000 $ 18,000
Finished Goods Inventory $ 30,000 $ 20,000
Additional information for the year is as follows:
Raw materials purchases $ 100,000
Direct labor $ 75,000
Manufacturing overhead applied $ 80,000
Indirect materials $ 0
Compute the cost of goods manufactured.
Direct materials used = $20,000 + $100,000 - $0 - $30,000 = $90,000. Current manufacturing costs = $90,000 + $75,000 + $80,000 = $245,000. Cost of goods manufactured = $15,000 + $245,000 - $18,000 = $242,000.
McGown Corp. has the following information:
Beginning Inventory (1/1) Ending Inventory (12/31)
Raw Materials Inventory $ 20,000 $ 30,000
Work in Process Inventory $ 15,000 $ 18,000
Finished Goods Inventory $ 30,000 $ 20,000
Additional information for the year is as follows:
Raw materials purchases $ 100,000
Direct labor $ 75,000
Manufacturing overhead applied $ 80,000
Indirect materials $ 0
Compute the unadjusted cost of goods sold.
Direct materials used = $20,000 + $100,000 - $0 - $30,000 = $90,000. Current manufacturing costs = $90,000 + $75,000 + $80,000 = $245,000. Cost of goods manufactured = $15,000 + $245,000 - $18,000 = $242,000. Cost of goods sold = $30,000 + $242,000 - $20,000 = $252,000.
Which of the following is a characteristic of process costing?
It is employed by companies that use standardized processes.
Which of the following statements is true?
A process costing system will have a separate Work in Process Inventory account for each of the major processes.
To reconcile the number of physical units using the weighted average method of process costing, one must determine whether the units were:
completed or still in process at the end of the period.
Which of the following relationships is correct?
Beginning units in inventory + units started = units completed + ending units in inventory
Beginning units in inventory + units started = units completed + ending units in inventory
Beginning inventory, plus units started, less units completed equals ending inventory. 1,300 + 13,000 - 12,000 = 2,300
An equivalent unit is calculated by:
multiplying the number of physical units by the percentage of completion.
Brody Corp. uses a process costing system in which direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Beginning inventory for January consisted of 1,300 units that were 40% completed. 13,000 units were started into the process during January. On January 31, the inventory consisted of 650 units that were 70% completed. What would be the equivalent units for conversion cost using the weighted average method?
First calculate completed units to be 13,650 (1,300 + 13,000 - 650) = 13,650 Then, convert completed units to equivalent units for both direct materials (100% complete) and conversion costs (70% complete) (13,650 × 100%) + (650 × 70%) = 14,105
Gatlin Manufacturing adds direct materials at the beginning of the production process, while conversion costs are incurred uniformly throughout the process. At the end of the period, equivalent units for direct materials were 250 more than equivalent units for conversion costs. 1,000 units were started during the period, and 1,000 units were also completed. Ending Work in Process Inventory was 50% complete. How many physical units were in ending Work in Process Inventory?
(100% × 1,000) + (100% × WIP) = 250 + (100% × 1,000) + (50% × WIP). WIP = 250/0.5 = 500.
Kenney Co. uses process costing to account for the production of canned energy drinks. Direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Equivalent units have been calculated to be 19,200 units for materials and 16,000 units for conversion costs. Beginning inventory consisted of $11,200 in materials and $6,400 in conversion costs. April costs were $57,600 for materials and $64,000 for conversion costs. Ending inventory still in process was 6,400 units (100% complete for materials, 50% for conversion). The cost per equivalent unit for conversion costs using the weighted average method would be:
Cost per equivalent unit for conversion = ($6,400 + $64,000)/16,000 = $4.40.
Livingston Co. uses process costing to account for the production of elastic bands. Direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Beginning inventory consisted of $14,000 in materials and $8,000 in conversion costs. April costs were $72,000 for materials and $80,000 for conversion costs. During April 8,000 units were completed. Ending work in process inventory was 4,000 units (100% complete for materials, 50% for conversion). The equivalent cost per unit for materials using the weighted average method would be closest to:
EUs for materials = (8,000 × 100%) + (4,000 × 100%) = 12,000. Cost per equivalent unit for materials = ($14,000 + $72,000)/12,000 = $7.1667.
Livingston Co. uses process costing to account for the production of elastic bands. Direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Beginning inventory consisted of $14,000 in materials and $8,000 in conversion costs. April costs were $72,000 for materials and $80,000 for conversion costs. During April 8,000 units were completed. Ending work in process inventory was 4,000 units (100% complete for materials, 50% for conversion). The total cost per unit using the weighted average method would be:
Equivalent units for materials = (8,000 × 100%) + (4,000 × 100%) = 12,000, and for conversion costs, (8,000 × 100%) + (4,000 × 50%) = 10,000. Cost per equivalent unit for conversion costs = ($8,000 + $80,000)/10,000 = $8.80. For materials, ($14,000 + $72,000)/12,000 = $7.1667. Total cost per unit = $8.80 + $7.1667 = $15.9667.
To determine how much cost should be assigned to ending Work in Process Inventory:
multiply costs per equivalent unit by the number of equivalent units associated with ending Work in Process Inventory.
To determine how much cost should be transferred out of Work in Process Inventory:
multiply costs per equivalent unit by the number of equivalent units associated with units completed.
Togo Co. uses process costing to account for the production of picture frames. Direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Equivalent units have been calculated to be 12,000 units for materials and 10,000 units for conversion costs. Beginning inventory consisted of $14,000 in materials and $8,000 in conversion costs. April costs were $72,000 for materials and $80,000 for conversion costs. Ending inventory still in process was 4,000 units (100% complete for materials, 50% for conversion). The value of ending inventory using the weighted average method would be closest to:
Cost per equivalent unit = ($8,000 + $80,000)/10,000 = $8.80 for conversion costs and ($14,000 + $72,000)/12,000 = $7.1667 for materials. Equivalent units for ending inventory = 4,000 × 50% = 2,000 for conversion costs and 4,000 × 100% = 4,000 for materials. ($8.80 × 2,000) + ($7.1667 × 4,000) = $46,266.80.
Cost per equivalent unit = ($8,000 + $80,000)/10,000 = $8.80 for conversion costs and ($14,000 + $72,000)/12,000 = $7.1667 for materials. Equivalent units for ending inventory = 4,000 × 50% = 2,000 for conversion costs and 4,000 × 100% = 4,000 for materials. ($8.80 × 2,000) + ($7.1667 × 4,000) = $46,266.80.
Equivalent units for materials = (8,000 × 100%) + (4,000 × 100%) = 12,000, and for conversion costs = (8,000 × 100%) + (4,000 × 50%) = 10,000. Cost per equivalent unit for conversion costs = ($4,000 + $40,000)/10,000 = $4.40 and for materials = ($7,000 + $36,000)/12,000 = $3.5833. Equivalent units for ending inventory = 4,000 × 50% = 2,000 for conversion costs and 4,000 × 100% = 4,000 for materials. ($4.40 × 2,000) + ($3.5833 × 4,000) = $23,133.20.
TryFit Co. uses process costing to account for the production of energy food bars. Direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. Beginning inventory consisted of $7,000 in materials and $4,000 in conversion costs. April costs were $36,000 for materials and $40,000 for conversion costs. During April 8,000 units were completed. Ending work in process inventory was 4,000 units (100% complete for materials, 50% for conversion). The value of units completed and transferred out using the weighted average method would be closest to:
Equivalent units for materials = (8,000 × 100%) + (4,000 × 100%) = 12,000, and for conversion costs = (8,000 × 100%) + (4,000 × 50%) = 10,000. Cost per equivalent unit for conversion costs = ($4,000 + $40,000)/10,000 = $4.40, and for materials = ($7,000 + $36,000)/12,000 = $3.5833. Total cost per unit = $4.40 + $3.5833 = $7.9833. Completed units = 12,000 - 4,000 = 8,000. $7.9833 × 8,000 = $63,866.40.
Lincoln, Inc., which uses a volume-based cost system, produces cat condos that sell for $90 each. Direct materials cost $15 per unit, and direct labor costs $10 per unit. Manufacturing overhead is applied at a rate of 200% of direct labor cost. Nonmanufacturing costs are $27 per unit. What is the gross profit margin for the cat condos?
Total manufacturing cost per unit = $15 + $10 + (200% × $10 or $20) = $45 per unit. Gross margin = $90 - $45 = $45; as a percentage of sales, this is $45/$90 = 50%.
An activity that is performed to benefit the organization as a whole is a(n):
facility-level activity.
Which of the following best defines a product-level activity?
An activity that is performed to support a specific product line
Which of the following is the correct formula to compute an activity rate?
Divide the total activity cost by the total activity driver
Lynwood, Inc. produces two different products (Product A and Product X) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The activity rate for Machining is $125 per machine hour, and the activity rate for Inspection is $500 per batch. The activity drivers are used as follows:
Product A Product X Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the amount of Machining cost assigned to Product X?
Multiply the number of machine hours for Product X by the activity rate per machine hour: 3,000 × $125 = $375,000.
Washington, Inc. produces two different products (Product C and Product 2) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $750,000, while the cost of Inspection is $90,000. The activity drivers are used as follows:
Product C Product 2 Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
What is the activity rate for Machining?
Divide total activity cost by total activity driver: $750,000/4,000 = $187.50 per machine hour.
Culver, Inc. produces two different products (Product V3 and Product G8) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The activity drivers are used as follows:
Product V3 Product G8 Total
Machine hours 1,000 3,000 4,000
Number of batches 45 15 60
The activity rate for Inspection is $750 per batch. What is the total cost of Inspection?
Multiply the total number of batches by the activity rate per Inspection: $750 × 60 = $45,000.
efferson, Inc. produces two different products (Product 5 and Product Z) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. The activity drivers are used as follows:
Product 5 Product Z Total
Machine hours 1,200 4,800 6,000
Number of batches 60 20 80
What proportion of Machining activity is used by Product Z?
Divide machine hours for Product Z by total machine hours: 4,800/6,000 = 80%.
Jackson, Inc. produces two different products (Product 5 and Product Z) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches. What is the total Machining cost assigned to Product 5?
Multiply the percentage of machine hours used by Product 5 by the total cost of machining: 20% × $500,000 = $100,000.
Jackson, Inc. produces two different products (Product 5 and Product Z) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. Product 5 uses 20% of total machine hours and 75% of total batches. What is the total Inspection cost assigned to Product 5?
Multiply the percentage of total batches used by Product 5 by the total cost of inspection: 75% × $30,000 = $22,500.
Cottonwood, Inc. produces two different products (Standard and Luxury) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. Standard uses 30% of total machine hours and 70% of total batches. What is the total activity cost assigned to Standard?
(30% × $500,000) + (70% × $30,000) = $171,000.
Cottonwood, Inc. produces two different products (Standard and Luxury) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. Standard uses 30% of total machine hours and 70% of total batches. What is the total activity cost assigned to Luxury?
(70% × $500,000) + (30% × $30,000) = $359,000.
Pima, Inc. manufactures calculators that sell for $40 each. Each calculator uses $15 in direct materials and $5 in direct labor per unit. Pima has two activities: Machining, which is applied at the rate of $4 per machine hour, and Finishing, which is applied at the rate of $20 per batch. This month, Pima made 400 calculators, using 1,000 machine hours in 40 batches. What is the total manufacturing cost for one calculator?
Total manufacturing costs include direct materials, direct labor, and overhead: $15 + $5 + [($4 × 1,000)/400] + [($20 × 40)/400] = $32.
Pima, Inc. manufactures calculators that sell for $40 each. Each calculator uses $15 in direct materials and $5 in direct labor per unit. Pima has two activities: Machining, which is applied at the rate of $4 per machine hour, and Finishing, which is applied at the rate of $20 per batch. This month, Pima made 400 calculators, using 1,000 machine hours in 40 batches. What is the gross profit for one calculator?
Total manufacturing costs include direct materials, direct labor, and overhead: Total manufacturing cost = $15 + $5 + [($4 × 1,000)/400] + [($20 × 40)/400] = $32
Gross profit = Sales Price - Manufacturing Cost = $40 - $32 = $8.
Parker Woodworks manufactures baseball bats and wooden tops. Currently, Parker makes 5,000 baseball bats each month. Each bat uses $1.00 in direct materials and $0.50 in direct labor. Parker uses two activities in manufacturing the baseball bats: Cutting and Finishing. The cost associated with Cutting is $7,500 a month, allocated on the basis of direct labor hours. The cost associated with Finishing is $12,000 a month, allocated on the basis of batches. The activity drivers are used as follows:
Baseball bats Wooden tops
Direct labor hours 100 200
Batches 4 6
What is the total manufacturing cost for one baseball bat?
Total manufacturing costs include direct materials, direct labor, and overhead: $1.00 + $0.50 + [($7,500 × 100/300)/5,000] + [($12,000 × 4/10)/5,000] = $2.96
Which of the following is most likely to be true of the manufacturing overhead costs assigned to a product with relatively low volume and high complexity?
An ABC system will assign more manufacturing overhead costs to the product than a volume-based system.
A cost that is $28.00 per unit when production is 70,000, and $28.00 per unit when production is 112,000.
A cost that is $28.00 per unit when production is 70,000, and $17.50 per unit when production is 112,000.
A cost that is $28.00 per unit when production is 70,000, and $56.00 per unit when production is 112,000.
A cost that is $56.00 per unit when production is 70,000, and $56.00 per unit when production is 112,000.
Which of the following is a fixed cost?
B
A fixed cost decreases per unit when activity increases, but stays the same in total. ($28.00 × 70,000 = $1,960,000 in fixed costs; $1,960,000/112,000 units = $17.50 per unit)
A step cost:
is fixed over some range of activity.
Onini, Inc. produces one product with two production levels: 20,000 units and 80,000 units. At each production level, Onini’s per-unit costs for Costs A, B, and C are:
Cost A (per unit) Cost B (per unit) Cost C (per unit) Production = 20,000 $ 12.00 $ 15.00 $ 20.00 Production = 80,000 $ 12.00 $ 11.25 $ 5.00
What type of cost is each?
Cost A is variable, Cost B is mixed, and Cost C is fixed.
A variable cost stays the same per unit but increases in total when production increases, a fixed cost decreases per unit but stays the same in total when production increases, and a mixed cost decreases per unit and increases in total when production increases.
Elm uses the high-low method of estimating costs. Elm had total costs of $250,000 at its lowest level of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 10,000 units, total costs were $390,000. Elm would estimate variable cost per unit as:
Use the slope formula to estimate variable cost per unit. Divide the difference in total cost by the difference in activity. ($390,000 - $250,000)/(10,000 - 5,000) = $28.00 per unit.
Meadow uses the high-low method. It had total costs of $500,000 at its lowest level of activity when 5,000 units were sold. When, at its highest level of activity, sales equaled 12,000 units, total costs were $780,000. Meadow would estimate fixed costs as:
Use the slope formula to calculate variable cost per unit. Divide the difference in total cost by the difference in activity. (($780,000 - $500,000)/(12,000 - 5,000) = $40.00 per unit) Fixed cost is equal to total cost less variable cost at each activity level. ($780,000 - ($40.00 × 12,000) = $300,000 or $500,000 - ($40.00 × 5,000) = $300,000)
Winston uses the high-low method. It had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units. What would Winston estimate its total cost to be if sales equaled 8,000 units?
Total cost at the low level is $10.00 × 10,000 = $100,000, and total cost at the high level is $6.50 × 20,000 = $130,000. Variable cost per unit = ($130,000 - $100,000)/(20,000 - 10,000) = $3.00 per unit. Fixed cost = $100,000 - ($3.00 × 10,000) = $70,000 or $130,000 - ($3.00 × 20,000) = $70,000. At 8,000 units, total cost would be ($3.00 × 8,000) + $70,000 = $94,000.
Orchid Corp. has a selling price of $15, variable costs of $10 per unit, and fixed costs of $25,000. If Orchid sells 13,000 units, contribution margin will equal:
Contribution margin = Sales revenue - Variable costs = ($15 × 13,000) - ($10 × 13,000) = $65,000. Alternatively, contribution margin per unit is $5.00 ($15.00 - $10.00 = $5.00), multiplied by the number of units (13,000) equals $65,000 (total contribution margin).
Laredo, Inc. has a contribution margin ratio of 45%. This month, sales revenue was $200,000, and profit was $40,000. If sales revenue increases by $20,000, by how much will profit increase?
The contribution margin ratio (45%) multiplied by the increase to sales revenue ($20,000) tells us how much profit will increase. ($20,000 × 45% = $9,000)
