New - Planning and Measurement Flashcards
Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units.
How would Lynn’s ratios using absorption costing compare with those using variable costing?
Current ratio Return on stockholders’ equity
Same Same
Same Smaller
Greater Same
Greater Smaller
Current ratio Return on stockholders’ equity
Greater Smaller
Current ratio = current assets/current liabilities. Return on stockholders’ equity = net income/average owners’ equity. Absorption costing allocates both variable and fixed manufacturing costs to inventory. Variable costing assigns only variable manufacturing cost to inventory and expenses fixed manufacturing overhead as a period cost. Therefore, ending inventory, and thus, current assets, are higher under absorption costing by the amount of fixed overhead allocated to ending inventory. The current ratio under absorption costing is, therefore, higher than under variable costing. Income in the current period is the same under both absorption costing and variable costings because the fixed overhead allocation rate has not changed, and ending inventory quantities have not changed. Therefore, total expenses recognized for the life of the firm for absorption costing are less than for variable costing by the amount of fixed overhead remaining in those 5,000 units at the end of Year 2. Thus, retained earnings are higher for absorption costing, causing the denominator of return on stockholders’ equity to be greater, and finally causing the ratio to be smaller for absorption costing.
The forming department is the first of a two-stage production process. Spoilage is identified when the units have completed the forming process.
The costs of spoiled units are assigned to units completed and transferred to the second department in the period when spoilage is identified.
The following information concerns forming’s conversion costs in May Year 1:
Units Conversion costs Beginning work-in-process (50% complete) 2,000 $10,000 Units started in May 8,000 75,500 Spoilage-normal 500 Units completed and transferred 7,000 Ending work-in-process (80% complete) 2,500
Using the weighted average method, what was forming's conversion cost transferred to the second production department? A. $59,850. B. $64,125. C. $67,500. D. $71,250.
C. $67,500.
The weighted average method counts all work done, including the beginning inventory, in the computation of the cost per equivalent unit. The method, thus, produces costs per equivalent unit that are averages of the work done in two different periods. Normal spoilage is detected at completion.
Thus, the spoiled units receive a full complement of conversion (and material) cost. Equivalent units for conversion cost under the weighted average method:
Units completed and transferred out, including normal spoilage 7,500
Ending inventory (.80)2,500 2,000
Equals total equivalent units of work for conversion cost through the end of the current period 9,500
Total conversion cost/equivalent unit for conversion cost = ($10,000 + $75,500)/9,500 = $9.
Conversion cost of goods transferred out: $9(7,500) = $67,500.
A process costing system was used for a department that began operations in January Year 1.
Approximately the same number of physical units, at the same degree of completion, were in work in process at the end of both January and February. Monthly conversion costs are allocated between ending work in process and units completed.
Compared to the FIFO method, would the weighted average method use the same or a greater number of equivalent units to calculate the monthly allocations?
Equivalent units for weighted average compared to FIFO - January Equivalent units for weighted average compared to FIFO - February
Same Same
Greater number Greater number
Greater number Same
Same Greater number
Same Greater number
The weighted average method (WA) uses the equivalent units of work to complete beginning inventory, as well as goods started in the period. There is no beginning inventory in January; thus, WA and FIFO would use the same equivalent units for calculating costs per equivalent unit and for allocating to work in process and transferred out units. However, in February, there is a beginning inventory, and WA would use a greater number of equivalent units. FIFO uses only the current number of units started in the period to compute cost per equivalent unit for each input.
Yola Co. manufactures one product with a standard direct labor cost of four hours at $12.00 per hour. In June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was A. $1,220. B. $1,200. C. $820. D. $400.
B. $1,200.
The DL efficiency variance =
(actual labor hours)(standard wage rate) - (standard labor hours)(standard wage rate) =
(4,100)($12) - (1,000 units x 4 hours)($12) =
$49,200 - $48,000 = $1,200
In Year 1, a department’s three-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity.
If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances have been affected?
Spending variance Volume variance
Increased Unchanged
Increased Increased
Unchanged Increased
Unchanged Unchanged
Spending variance Volume variance
Unchanged Increased
The spending variance is unaffected by the volume used for allocating the fixed overhead. The spending variance for the variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for the fixed overhead is the difference between the actual overhead and the master budget for the fixed overhead. Neither variance is affected by the denominator used for allocating the fixed overhead.
However, the volume variance (computed for fixed overhead only) is the difference between the master budgeted fixed overhead and the allocated fixed overhead. The allocated fixed overhead is the product of the predetermined overhead rate per direct labor hour, and standard direct labor hours. An increase in the denominator of the predetermined fixed overhead rate from 80% to 100% of capacity would cause the predetermined overhead rate to decline, along with the allocated fixed overhead. This would increase the volume variance because the master budgeted fixed overhead would remain unchanged.
Which of the following items is never relevant to a sell or process further decision?
A. Incremental revenue after the split-off point.
B. Incremental cost after the split-off point.
C. Joint costs.
D. Additional contribution margin realized if processed further.
C. Joint costs.
Joint costs are sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.
The following information is available on Crain Co.'s two product lines: Chairs Tables Sales $180,000 $48,000 Variable costs (96,000) (30,000) Contribution margin 84,000 18,000 Fixed costs: Avoidable (36,000) (12,000) Unavoidable (18,000) (10,800) Operating income (loss) $30,000 ($4,800)
Assuming the tables line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount? A. $13,200. B. $18,000. C. $24,000. D. $28,800.
B. $18,000.
If the table product line is discontinued, the contribution margin of $18,000 will be forfeited. However, $12,000 in fixed costs will be avoided, and the factory space rented will increase cash flow by $24,000 for a net increase of $18,000.
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.
This price covers the total variable cost of $9 and provides a contribution margin equal to that of the alternative use ($14-$9 = $5 CM per unit; $5,000/1,000 units = $5 CM per unit).
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:
Per unit Total Direct materials $4 $40,000 Direct labor 3 30,000 Fixed plant facility cost 2 20,000
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. Decrease $10,000. C. Increase $5,000. D. Increase $10,000.
C. Increase $5,000.
Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 + $15,000 in fixed cost that are presumed unavoidable versus a cost to make of $90,000.
