MANAGEMENT ACCOUNTING AND FINANCE

TUTORIAL 2

A- MATCHING

a) absorption costing Solution:

b) fixed cost 1. a
c) relevant range 2. j
d) variable costing 3. b
e) sales mix 4. i
f) mixed cost 5. f
g) variable cost 6. c
h) contribution margin 7. e
i) margin of safety 8. g
j) breakeven point 9. d
10. h

1. ________ The costing method that assigns all manufacturing costs to products
2. ________ The sales level at which operating income is zero
3. ________ A cost that does not change in total despite changes in volume
4. ________ Excess of expected sales over breakeven sales
5. ________ A cost that is part variable and part fixed
6. ________ A scope of activity in which a specific relationship exists between cost and volume
7. ________ Combination of products that make up total sales
8. ________ A cost whose total amount changes in direct proportion to changes in volume
9. ________ The costing method that assigns only variable manufacturing costs to products
10. ________ The excess of the sale price over the variable expense per unit

B- IDENTIFY

Place an F in the space provided if the cost is typically a fixed cost, a V if it is a variable cost, or an M
if it is a mixed cost.

a) mixed _ photocopying machine rent (X amount per month plus Y amount per copy)
b) fixed __ executive salaries
c) fixed __ property taxes
d) fixed __ insurance expense
e) variable units-of-production depreciation
f) variable direct materials
g) fixed __ building rent
h) variable sales commissions
i) variable delivery expenses
j) variable packing materials

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C- MULTIPLE CHOICE

1. A cost whose total amount changes in direct proportion to a change in volume is a(n):
a) variable cost
b) fixed cost
c) mixed cost
d) irrelevant cost

2. All of the following costs are examples of variable costs except:

a) direct materials
b) sales commissions
c) salary of plant manager
d) delivery costs

3. If production increases by 15%, then total variable costs will likely:

a) increase by 7.5%
b) increase by 15%
c) decrease by 15%
d) remain the same

4. Variable costs per unit will:

a) remain the same as production levels change
b) increase as production decreases
c) decrease as production increases
d) decrease as production decreases

5. Total variable costs will:

a) remain the same as production levels change
b) decrease as production decreases
c) decrease as production increases
d) increase as production decreases

6. Total fixed costs will:

a) increase as production decreases
b) decrease as production decreases
c) decrease as production increases
d) remain the same as production levels change

7. Fixed costs per unit will:

a) increase as production decreases
b) decrease as production decreases
c) increase as production increases
d) remain the same as production levels change

8. Which of the following is a characteristic of a variable cost?

a) Variable costs are variable per unit, and fixed in total.
b) Variable costs vary in total with production and sales.
c) Variable costs do not change in total over the relevant range.
d) All of the above are characteristics of variable costs.

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9. Which of the following is a fixed cost?
a) direct materials
b) units-of-production depreciation
c) sales commissions
d) straight-line depreciation

10. Variable costs:

a) vary per unit of output
b) are fixed in total
c) are fixed per unit and vary in total
d) decrease per unit as production volume increases

11. Renting a car and paying $15 per day plus $.03 per mile driven is an example of a:
a) fixed cost
b) mixed cost
c) variable cost
d) conversion cost

D- ANALYTICAL

1. Dillard Company has calculated its annual total fixed costs to be $50,000. Production for recent
years has averaged 40,000 units with total variable costs of $80,000. Based on the foregoing data,
complete the table below. Assume all activity levels are within the relevant range.

Activity Level Total Fixed Costs Unit Fixed Cost Total Variable Unit Variable Cost
Costs
20,000
30,000
40,000
55,000
80,000

Solution:

Activity Level Total Fixed Costs Unit Fixed Cost Total Variable Unit Variable Cost
Costs
20,000 $50,000 $2.50 $40,000 $2
30,000 $50,000 $1.67 $60,000 $2
40,000 $50,000 $1.25 $80,000 $2
55,000 $50,000 $0.91 $110,000 $2
80,000 $50,000 $0.63 $160,000 $2

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2. Calculate the unknowns for the following independent situations. All given activity levels are
within the relevant range.

1) Total fixed costs for Company A are $250,000. Total costs, both fixed and variable, are
$378,000 for Company A when 40,000 units are produced.

Calculate:
a) variable cost per unit
b) fixed cost per unit

2) Total fixed costs for Company Z are $200,000. Total costs, both fixed and variable, are
$450,000 if 125,000 units are produced.

Calculate:
a) variable cost per unit
b) fixed cost per unit if 125,000 units are produced
c) total variable costs if production decreases to 100,000 units

3) Total variable costs are $300,000 if 50,000 units are produced. Total fixed costs are $150,000 if
35,000 units are produced.

Calculate:
a) unit variable cost
b) fixed cost per unit if 35,000 units are produced
c) total variable costs if 35,000 units are produced

Solution:

1) a) $378,000 – $250,000 = $128,000

$128,000/40,000 = $3.20
b) $250,000/40,000 = $6.25

2) a) $450,000 – $200,000 = $250,000

$250,000/125,000 = $2.00
b) $200,000/125,000 = $1.60
c) 100,000 X $2 = $200,000

3) a) $300,000/50,000 = $6.00
b) $150,000/35,000 = $4.29 (rounded)
c) $6 X 35,000 = $210,000

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3. The Music Box Company manufactures compact discs. Each disc sells for $3.50 with unit variable
manufacturing expenses of $1.50. For the year ended December 31, 20X6, total fixed
manufacturing expenses were $325,000 and 500,000 discs were produced and sold. Marketing
expenses amounted to 8% of sale price plus $40,000 in fixed expenses. Administrative expenses
included $17,500 in fixed expenses and variable expenses equal to 5% of sale price.

a) Prepare a conventional income statement for the year ended December 31, 20X6.
b) Prepare a contribution margin income statement for the year ended December 31, 20X6.
c) Which of the two statements would be used by management for decision making and why?

Solution:
a)
The Music Box Company
Conventional Income Statement
Year Ended December 31, 20X6
Sales revenue $1,750,000
Cost of goods sold 1,075,000
Gross margin 675,000
Operating expenses:
Marketing expenses $180,000
Administrative expenses 105,000
Total operating expenses 285,000
Operating income $ 390,000

b)
The Music Box Company
Contribution Margin Income Statement
Year Ended December 31, 20X6
Sales revenue $1,750,000
Variable expenses:
Variable manufacturing cost of goods sold $750,000
Marketing expenses 140,000
Administrative expenses 87,500
Total variable expenses 977,500
Contribution margin 772,500
Fixed expenses:
Manufacturing expenses $325,000
Marketing expenses 40,000
Administrative expenses 17,500
Total fixed expenses 382,500
Operating income $ 390,000

c) Management would use the contribution margin income statement for decision making
because it provides management with a breakdown of expenses into their fixed and variable
components. This is important to help management predict changes in operating income due
to changes in both unit sales and sale price per unit.

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4. Queen Company gathered the following information for the year ended December 31, 20X7:

Queen Company
Income Statement
Year Ended December 31, 20X7
Sales revenue $650,000
Cost of goods sold 455,000
Gross margin 195,000
Operating expenses:
Marketing expenses $52,000
Administrative expenses 73,000
Total operating expenses 125,000
Operating income $ 70,000

Total fixed manufacturing expenses amounted to $210,000. Marketing expenses were 25%
variable and 75% fixed. Administrative expenses were 80% fixed and 20% variable.

a) Prepare a contribution margin income statement.

b) Assuming unit sales increase 20%, calculate the new operating income.

Solution:

a)
Queen Company
Contribution Margin Income Statement
Year Ended December 31, 20X7
Sales revenue $650,000
Variable expenses:
Variable manufacturing cost of goods sold $245,000
Marketing expenses 13,000
Administrative expenses 14,600
Total variable expenses 272,600
Contribution margin 377,400
Fixed expenses:
Manufacturing expenses $210,000
Marketing expenses 39,000
Administrative expenses 58,400
Total fixed expenses 307,400
Operating income $ 70,000

b) $377,400 X 1.2 = $452,880

$452,880 – $307,400 = $145,480

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