ACC103

Final Exam Information & Additional Practice Part I & II

 There are 2 sections in final exam:

- Section A: 20 MCQ (2 marks each) – covering all the chapters except 1, 2 & 3
 9 calculation questions [C4 (2), C5 (2), C7 (1), ACVCTC (4) & 11 theory-based
questions [C5 (1), C17 (1), C7 (1), C8 (1), C12 (2), C9 (3), C10 (2)
- Section B: 3 Problem Solving question – Chapter 7, 9, 10, 11 & 12
 Chapter 7: Cost-volume-profit analysis with theory from chapter 12 (14 + 3 = 17
MARKS)
 Chapter 9: Budget with theory from chapter 9 itself (18 + 4 = 22 MARKS)
 Chapter 10 & 11: Standard costing with interpretations (15 + 6 = 21 MARKS)

 Students are required to do Part II (please prepare and come for class next week for discussion)
& practice all tutorials and additional practice questions Part I (to be self-checked with solution
provided)

 This is a CLOSED BOOK physical examination

 Please take note that: STUDENTS ARE REQUIRED TO PASS FINAL EXAM TO PASS
THIS SUBJECT (ACC103)
 PART 1: Class Revision Question (TO BE DISCUSSED IN THE CLASS)

1. Gabe’s Auto produces and sells an auto part for $30.00 per unit. In 20X5, 100,000 parts were
produced and 75,000 units were sold. Other information for the year includes:
Direct materials $12.00 per unit
Direct manufacturing labor $ 2.25 per unit
Variable manufacturing costs $ 075 per unit
Sales commissions $ 3.00 per part
Fixed manufacturing costs $375,000 per year
Administrative expenses, all fixed$135,000 per year
a. What is the total contribution margin and net profit?
b. What is the total gross profit and net profit?

2. Factory produces and sells decorative pillows for $300.00 per set. In the first month of
operation, 3,000 units were produced, and 2,650 units were sold. Actual fixed costs are the
same as the amount budgeted for the month. Other information for the month includes:
Variable manufacturing costs $80.00 per set
Variable marketing costs $12.00 per set
Fixed manufacturing costs $28.00 per set
Administrative expenses, all fixed $120,000 per month
a. What is the total contribution margin and net profit?
b. What is the total gross profit and net profit?

3. Factory produces and sells a decorative pillow for $100.00 per set. In the first month of
operation, 5,000 units were produced and 4,500 units were sold. Actual fixed costs are the
same as the amount budgeted for the month. Other information for the month includes:
Variable manufacturing costs $80.00 per set
Variable marketing costs $12.00 per set
Fixed manufacturing costs $300,000 in total
Administrative expenses, all fixed $120,000 in total
a. What is the difference in net profit between both absorption and variable costing? By
how much and which is higher?

4. Joe Company uses a process-cost system for its single product. Material X is added at the end of the
process; in contrast, material Y is added when the units are 70% complete. The firm's ending work-
in-process inventory consists of 8,000 units that are 70% complete. What is the equivalent units
of production with respect to materials X and Y in the ending work-in-process inventory?

5. Joe Company uses a process-cost system for its single product. Material X is added at the
beginning of the process; in contrast, material Y is added when the units are 70% complete. The
firm's ending work-in-process inventory consists of 8,000 units that are 70% complete. What is
the e equivalent units of production with respect to materials X and Y in the ending work-in-
process inventory?

6. Joe Company uses a process-cost system for its single product. Material X is added uniformly in
the process; in contrast, material Y is added when the units are 70% complete. The firm's ending
work-in-process inventory consists of 8,000 units that are 70% complete. What is the equivalent
units of production with respect to materials X and Y in the ending work-in-process
inventory?
7. Joe Company uses a process-cost system for its single product. Material X is added uniformly in
the process; in contrast, material Y is added when the units are 85% complete. The firm's ending
work-in-process inventory consists of 8,000 units that are 70% complete. What is the equivalent
units of production with respect to materials X and Y in the ending work-in-process
inventory?

8. TUTU had 10,000 units of work in process on June 1. During June, 30,000 units were started and
as of June 30, 7,000 units remained in production. How many units were completed during
June?
9. TUTU had 12,000 units of work in process on June 1. During June, 35,000 units were started and
as of June 30, 40,000 completed during June. How many units remain in production?
10. TUTU had 12,000 units of work in process on June 1. During June, 40,000 units completed
during June and, 10,000 remained in production as of June 30. How many units were started?

11. The manufacturing overhead of the factory are as follows:

Machining RM850,000
Assembly RM430,000
Material Handling RM115,000
Inspection RM235,000

Madhavan, the chief financial officer has been reading about the new type of costing method
called ABC. He confirmed that ABC would cast a new light on the future profits. As a result,
the company’s director of cost management has accumulated cost pool information for this
year shown on the following chart. The information is based on a product mix of 4,000 TUTU
& 5,000 TATA.
Cost Pool Information for 2017
Cost Pools Activity TUTU TATA
Direct labour Direct labour hours 10,000 5,000
Material handling Number of parts 5 10
Inspection Inspection hours 5,000 7,500
Machining Machine hours 15,000 30,000
Assembly Assembly hours 6,000 5,500
a. How much is the pool rate for each activity?
b. How much overhead will be allocated for each product?
12. Hope Inc. is a manufacturing company that produces fertilizer for various industrial
uses.
The standard costs for 1 bag of fertilizer are as follows:
Direct materials (5 kg @ $4.00 per kg)
Direct labour (1.5 hours @ $8.00 per hour)
Variable Overhead (1.5 hours @ $2.80 per hour)

Actual results for the last year were:

Actual output 220,000 bags
Direct materials (purchased and used 1,023,000 kg) $ 4,347,750
Direct labor (308,000 hours worked) 2,371,600
Variable overhead 954,800
Overhead is allocated using direct labour hours.

Required to calculate the following variances:

a. Direct material price, quantity and total variances
b. Direct labour price, quantity and total variances
c. Variable overhead spending, efficiency and total variances
d. Interpret material & labour variances
13. Tin Factory manufactures metal sheets. It produced 6,000 metal sheets.

Details provided are as follows:

Standard direct materials required per unit is 2 kg at standard cost of $2.00 per kg. The direct
material purchased and used during the month was 11,500kg at a total cost of $24,150.

The direct labor worked a total of 18,200 hours at total wages of $136,500. Standard direct
labor required per unit is 3 hours at standard rate of $7 per hour.

Budgeted direct labour hour per unit is 3 hours. The standard variable overhead rate is $4.90
per labour hour.

The actual variable overhead incurred were $72,000 Actual machine hour used during month
was 15,000 hours.

Overheads are allocated on the basis on labour hour

Required:
Calculate the following variances:
a. Direct material price, quantity and total variances
b. Direct labor price, quantity and total variances
c. Variable overhead spending, efficiency and total variances

14. Following are information for the standard and actual costs:
Estimated activity & standard cost per unit
 The factory estimated that it would require 6 kg of material per unit at an expected cost of
RM3.00 per kg.
 It also estimated to use 2.5 direct labour hours per unit and estimated to pay wages at a
rate of RM10.50 per hour.
 The standard variable overhead rate estimated were RM2.50 per hour.

Actual activity & cost

 The factory manufactured 115,000 bottles of soluble food.
 The factory purchased and used 700,000 kg of material at total cost of RM2,170,000.
 The factory used 300,000 direct labor hours and paid at a total wages of RM3,300,000.
 The total variable cost incurred was RM700,000.

Factory allocates its overhead on the basis on direct labour hours.

You are required:

a. To calculate direct material price variance, quantity variance and total direct material
variance
b. To calculate direct labour rate variance, efficiency variance and total direct labour
variance
c. To calculate variable overhead spending variance, efficiency variance and total
variable overhead variance
15. NIKEE Sports manufactures energy boosters for athletes and has the following
information for the standard and actual costs:

Actual activity & cost

 The factory manufactured 60,000 packets of boosters.
 The factory purchased and used 137,500 kg of material at total cost of RM921,250.
 The factory used 80,000 direct labor hours and paid at a total wages of RM480,000.
 The total variable cost incurred was RM700,000.

Estimated activity & standard cost per unit

 The factory estimated that it would require 2.5 kg of material per unit at an expected cost
of RM6.50 per kg.
 It also estimated to use 1.5 direct labour hours per unit and estimated to pay wages at a
rate of RM5.50 per hour.
 The standard variable overhead rate estimated were RM8 per hour.

NIKEE Sports allocates its overhead on the basis on direct labour hours.

You are required:

a. To calculate direct material price variance, quantity variance and total direct material
variance
b. To calculate direct labour rate variance, efficiency variance and total direct labour
variance
c. To calculate variable overhead spending variance, efficiency variance and total
variablAe overhead variance
 16. Sales & production budget for months below are:

Jan Feb Mar Apr

Production 2000 4000 5000 9000
 The selling price per unit is expected to be RM10. Sales are made based on 50% cash
which will be collected in the same month whereas the remaining 50% will be
collected based on 30% in the month after sales and balance 2 months after sales.
 Each unit above would require 10 kg of material. The factory intends to have ending
inventory of direct material equivalent to 10% of the following month’s material
usage requirement. All materials purchased at $20 per kg and will be paid the
following month.
 Every unit produced required 4 direct labor hours and direct labors are paid at rate of
$25 per hour. All direct labours are paid following month.

Required:
a. Prepare a direct material budget for Feb and Mar (including the payments to suppliers
during these 2 months).
b. Prepare a direct labour budget for Feb and Mar (including the payments to direct
labour during these 2 months).
 17. Following details were obtained from the factory that produces bottles of vitamins:
 Factory currently produces 5,000 bottles of vitamins (April 2022). Due to the
increasing demand from the athletes, the production is expected to be 6,000 bottles of
vitamins (May 2022), 7,500 bottles of vitamins (June 2022), 8,000 bottles of vitamins
(July 2022) & 10,000 bottles of vitamins (August 2022).
 The factory is estimated to use 5 litre of nutrition liquid for every bottle it produces.
 Due to the increased production, the factory is estimated to have ending inventory of
material (nutrition liquid) equivalent to 20% of the followings month’s material
(nutrition liquid) usage requirement.
 All materials (nutrition liquid) will be purchased on credit at @ RM30 per litre of
nutrition liquid. The suppliers are estimated to be paid in the month of purchase.
 5 DIRECT LABOUR HOURS ARE REQUIRED TO COMPLETE THE PRODUCT.
DIRECT LABOURS ARE PAID AT THE RATE OF $15 PER HOUR BY THE 7TH
OF FOLLOWING MONTH.
Required:
a. Prepare a DIRECT MATERIAL BUDGET for May AND June (including the
collection from customers during these 2 months).
b. Prepare a direct LABOUR budget for May and June (including the payments to
suppliers during these 2 months).

18. The following details were obtained from the factory that produces boots:

 The factory is estimated to use 1.5 square meter of leather material for every boots it
produces. Due to the increased production, the factory is estimated to have ending
inventory of material (leather) equivalent to 30% of the followings month’s material
(leather) usage requirement. All materials (leather) will be purchased on credit at
@20.00 per square meter. The suppliers are estimated to be paid in the month
following purchase.
 The factory is also estimated to use 6 hours of direct labour hour to produce 1 unit of
boots. Direct labours are expected to be paid at the rate of RM30 per hour. Direct
labours are usually paid on 7th of the following month.
 Production is expected to be 2,000 boots (January 2022), 2,500 boots (February
2022), 3,000 boots (March 2022) & 5,000 boots (April 2022).

You are required to prepare:

a. Direct material usage and purchase budget (including payment to suppliers) for the
month of February and March 2022
b. Direct labour budget (including payment to direct labour) for the month of February
and March 2022
19. Pure Joy Inc. manufactures and sells pure mango juice, Mango Joy. Following were the
planned production:
July 2,600
Aug 2,800
Sept 4,000
Oct 7,000

Each bottle of Mango Joy requires 0.5 kg of mango puree. Mango puree costs $3.50 per kg.
Pure Joy normally keeps the ending raw material inventory at 30% of the following month’s
direct material usage requirement. Pure Joy pays its suppliers 1 month after the purchase.
Each unit 6.5 hours per unit and labour are paid at the rate of $12 per hour. Labours are paid
by 10th of following month..

Required :

(a) Prepare the direct materials usage and purchases budget (including payments to suppliers)
for the months of Aug and Sept.
(b) Prepare the direct labour budget (including payments to employees) for the months of
Aug and Sept.
20. BriteRay Ltd. produces mini lcd projectors. Each unit sells for $1,800. Last year
the company sold 10,500 units. Its annual total fixed costs amounted to
$5,500,000. BriteRay’s variable cost per unit is 65% of its selling price. Ignore
income tax considerations.

Required :

a. Calculate the breakeven point (in units) for the previous year.
b. Compute the net profit for the previous year
c. Compute the net profit after tax for the previous year if tax rate is 20%.
d. With current planning among the board, there is a consideration that fixed cost be
increased by 20% with new new break even point to be 7,800 units.
It is also believed that this increase in price will result in fall by 10% based on last
year sales. Determine the new selling price and units to be sold to achieve same
profit as last year. Justify if the plan to be successful or not?
21. Demand for the previous 2016 was 92,000 units.

Selling price at $150 per unit.

Manufacturing cost: Variable per unit (Direct material $40, Direct labour $25 & overhead
$10) and Selling & administrative cost: Variable per unit $3
Total Fixed cost: $5,112,000 in total

In 2017, Comm-Unity has decided to invest more in its fixed advertising costs and non-
current assets to capture a larger market share. This plan would increase its annual total
fixed costs by 12%.

Ignore income tax considerations.

Required:
(a) Calculate the breakeven point (in units) & (sales revenue) for the 2016.
(b) Compute the net profit for the 2016
(c) Compute the number of devices Comm-Unity needs to sell in 2017 to achieve the
same net profit as the 2016, if the planned increase in the fixed cost is implemented.
(d) It is expected all variable cost to increase by 30% which will also raise the selling
price by 25%. Calculate the number of units to produce to break-even and number of
units to sell to achieve the targeted profit as shown in (b)

22. KICKERS, the sole manufacturer of soccer balls. The following information was
obtained from the KICKERS:
 Total fixed manufacturing cost were RM500,000 and total selling, marketing and
administrative cost were RM300,000.
 The variable manufacturing cost is RM5.50 per soccer ball and the variable selling
expense is RM3.50 per soccer ball.
 KICKERS managed to sell 150,000 soccer balls in the current year.
 The selling price per soccer ball is RM15.
 As part of its strategy to maximize the profit during the increased fixed cost,
KICKERS plans to increase its selling price by 30% per soccer ball next year. The
fixed manufacturing cost is expected to increase by 10%.
Ignore income tax considerations.
Required:
a. Calculate the current year’s breakeven in units and revenue (i.e. before the proposed
increases next year)
b. Compute the net profit for the current year (before the proposed increases next year.
Show all workings.
c. Compute the number of soccer balls KICKERS needs to sell in the following year in
order to achieve the same net profit as the current year (ie. the net profit calculated in
part (b) above), if the planned increase in the selling price per unit is implemented.
Assume that the variable cost per unit remains the same. Show all workings.
 23. Lemakz are the producers of Nasi Lemak. The following information was obtained
from the Lemakz:
 The breakeven point for current month was determined to be 30,000 units.
 In the current month, Lemakz managed to sell 35,000 units.
 As part of its strategy to manage the rising cost, Lemakz plans to increase its selling
price by 25% per unit in next month due to increase in variable cost by 20% and fixed
selling cost by 10%.
 Total fixed cost were RM600,000 (with 60% being related to manufacturing)
 The total variable cost of the factory is 80% of its selling price.

Ignore income tax considerations.

Required:
a. Calculate the variable cost per unit for current month (ie. before the increase in the
selling price per unit). Show all workings.
b. Compute the net profit for the current month (before the increase in the selling price
per unit). Show all workings.
c. What is the break-even in units after the changes take place. Compute the number of
units LEMAKZ needs to sell in the following month in order to achieve the same net
profit as the current month (ie. the net profit calculated in part (b) above), if the
planned increase in the selling price per unit is implemented. Assume that the variable
cost per unit remains the same. Show all workings.
 PART 2: Textbook Revision Question – Students are required to attempt questions
themselves and selected questions will be discussed by tutor during tutorial.

Chapter 4: Tutorials & 4.15, 4.17, 4.18, 4.19, 4.20

Chapter 5: Tutorials & 5.26, 5.27 & 5.56
Chapter 7: Tutorials & 7.24, 7.29, 7.31, 7.33, 7.37, 7.38 & 7.41
Chapter 8: Tutorials & 8.20, 8.21, 8.22, 8.23 * 8.35
Chapter 9: Tutorials & 9.23, 9.25 & 9.39
Chapter 10 & 11: Tutorials & 10.26, 10.35, 10.39 (Ignore all Direct Material Purchase
Price Variance), 11.22, 11.26, 11.32
(*) All solutions are after Part II revision questions
Solution: Textbook Questions
EXERCISE 4-15 (10 MINUTES)

The general formula for all three cases is the following:

Work-in-process, Units started Units completed Work-in-process,

+ – =
beginning during month during month ending

Using this formula, the missing amounts are:

1. 12,000 tons

2. 5,300 kilograms

3. 750,000 gallons
EXERCISE 4-17 (15 MINUTES)

1. 6,000 equivalent units (refer to (a) in the following table)

2. 4,400 equivalent units (refer to (b) in the following table)

CALCULATION OF EQUIVALENT UNITS: RAINBOW GLASS COMPANY

Weighted-Average Method
Percentage
of Equivalent Units
Completion with
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, October 1.... 1,000 60%
Units started during October. 5,000
Total units to account for....... 6,000

Units completed and

transferred out during October 4,000 100% 4,000 4,000
Work in process, October 31.. 2,000 20% 2,000 400
Total units accounted for........ 6,000 _____ ____
Total equivalent units............. (a) 6,000 (b) 4,400

EXERCISE 4-18 (15 MINUTES)

CALCULATION OF EQUIVALENT UNITS: TERRA ENERGY COMPANY - LODI

PLANT
Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, November 1............... 2,000,000 25%
Units started during November............ 950,000
Total units to account for...................... 2,950,000

Units completed and transferred

out during November........................ 2,710,000 100% 2,710,000 2,710,000
Work in process, November 30............. 240,000 80% 240,000 192,000
Total units accounted for....................... 2,950,000 ________ ________
Total equivalent units............................ 2,950,000 2,902,000
EXERCISE 4-19 (20 MINUTES)

CALCULATION OF EQUIVALENT UNITS: FIT-FOR-LIFE FOODS CORPORATION

Weighted-Average Method
 Percentage
of Percentage
Completion of
with Completion
Respect to with Equivalent Units
Physical Direct Respect to Direct
Units Material Conversion Materia Conversion
l
Work in process, January 1... 20,000 80% 60%
Units started during the year. 120,000
Total units to account for....... 140,000

Unit completed and

transferred out during the year 125,000 100% 100% 125,000 125,000
Work in process, December 31 15,000 70% 30% 10,500 4,500
Total units accounted for........ 140,000 ______ _______
Total equivalent units............. 135,500 129,500

EXERCISE 4-20 (15 MINUTES)

CALCULATION OF COST PER EQUIVALENT UNIT: IDAHO LUMBER COMPANY

Weighted-Average Method
Direct
Material Conversion Total
Work in process, November 1.................. $ 65,000 $180,000 $ 245,000
Costs incurred during November............ 425,000 690,000 1,115,000
Total costs to account for......................... $490,000 $870,000 $1,360,000
Equivalent units........................................ 7,000 1,740
Costs per equivalent unit.......................... $70* $500† $570

*$70 = $490,000 ÷ 7,000

†
$500 = $870,000 ÷ 1,740
EXERCISE 5-26 (15 MINUTES)

1. Material-handling cost per lens:

$50,000
× 200 = $1,000
[(25)(200) + (25)(200)] *

*The total number of direct-labor hours.

An alternative calculation, since both types of product use the same amount of the cost
driver, is the following:

$50,000
= $1,000
50*
*The total number of units (of both types) produced.

2. Material-handling cost per mirror = $1,000. The analysis is identical to that given for
requirement (1).

3. Material-handling cost per lens:

$50,000
×5†
(5+15)∗¿
=$500 ¿
25

*The total number of material moves.

†
The number of material moves for the lens product line.

4. Material-handling cost per mirror:

$50,000
×15*
(5+15 )
=$1,500
25

*The number of material moves for the mirror product line.

EXERCISE 5-27 (15 MINUTES)

1. a. Quality-control costs assigned to the Satin Sheen line under the traditional system:

Quality-control costs = 14.5%  direct-labor cost

Quality-control
costs assigned to
Satin Sheen line = 14.5%  $27,500
= $3,988 (rounded)

b. Quality-control costs assigned to the Satin Sheen line under activity-based costing:

Quantity for Assigned

Activity Pool Rate Satin Sheen Cost
Incoming material inspection...... $11.50 per type..... 12 types......... $ 138
In-process inspection.................... .14 per unit..... 17,500 units. . 2,450
Product certification..................... 77.00 per order... 25 orders....... 1,925
Total quality-control costs assigned........................................................... $4,513

2. The traditional product-costing system undercosts the Satin Sheen product line, with
respect to quality-control costs, by $525 ($4,513 – $3,988).

PROBLEM 5-56 (45 MINUTES)

1. a. WGCC's predetermined overhead rate, using direct-labor cost as the single cost
driver, is $5 per direct labor dollar, calculated as follows:

Overhead rate = total manufacturing-overhead cost

budgeted direct-labor cost
= $3,000,000/$600,000
= $5 per direct-labor dollar

b. The full product costs and selling prices of one pound of Kona and one pound of
Malaysian coffee are calculated as follows:

Kona Malaysia
n

Direct material...................................... $3.20 $4.20

Direct labor............................................ .30 .30
Overhead (.30$5)......................... 1.50 1.50
Full product cost................................... $5.00 $6.00
Markup (30%)...................................... 1.50 1.80
Selling price........................................... $6.50 $7.80
2. A new product cost, under an activity-based costing approach, is $7.46 per pound of
Kona and $4.82 per pound of Malaysian coffee, calculated as follows:

Budgeted Budgeted
Activity Cost Driver Activity Cost Unit Cost
Purchasing Purchase orders 1,158 $579,000 $500
Material handling Setups 1,800 720,000 400
Quality control Batches 720 144,000 200
Roasting Roasting hours 96,100 961,000 10
Blending Blending hours 33,600 336,000 10
Packaging Packaging hours 26,000 260,000 10
PROBLEM 5-56 (CONTINUED)

Kona Coffee

Standard cost per pound:

Direct material...................................................................................... $3.20

Direct labor........................................................................................... .30
Purchasing (4 orders  $500/2,000 lb.)............................................... 1.00
Material handling (12 setups  $400/2,000 lb.).................................. 2.40
Quality control (4 batches  $200/2,000 lb.)...................................... .40
Roasting (20 hours  $10/2,000 lb.).................................................... .10
Blending (10 hours  $10/2,000 lb.).................................................... .05
Packaging (2 hours  $10/2,000 lb.).................................................... .01
Total cost............................................................................................... $7.46

Malaysian Coffee

Standard cost per pound:

Direct material...................................................................................... $4.20

Direct labor........................................................................................... .30
Purchasing (4* orders  $500/100,000 lb.)......................................... .02
Material handling (30 setups  $400/100,000 lb.).............................. .12
Quality control (10 batches  $200/100,000 lb.)................................ .02
Roasting (1,000 hours  $10/100,000 lb.)........................................... .10
Blending (500 hours  $10/100,000 lb.).............................................. .05
Packaging (100 hours  $10/100,000 lb.)............................................ .01
Total cost............................................................................................... $4.82

*Budgeted sales ÷ purchase order size

100,000 lbs. ÷ 25,000 lbs. = 4 orders
PROBLEM 5-56 (CONTINUED)

3. a. The ABC analysis indicates that several activities other than direct labor drive
overhead. The cost computations show that the current system significantly
undercosted Kona coffee, the low-volume product, and overcosted the high-
volume product, Malaysian coffee.

b. The implication of the ABC analysis is that the low-volume products are using
resources but are not covering their share of the cost of those resources. The
Kona blend is currently priced at $6.50 [see requirement 1(b)], which is
significantly below its activity-based cost of $7.46. The company should set long-
run prices above cost. If there is excess capacity and many of the costs are fixed,
it may be acceptable to price some products below full activity-based cost
temporarily in order to build demand for the product. Otherwise, the high-
volume, high-margin products are subsidizing the low-volume, low-margin
products.
EXERCISE 7-24 (20 MINUTES)

fixed expenses
1. Break-even point (in units) = unit contribution margin
$40,000
= $10−$5 = 8,000 pizzas
unit contribution margin
2. Contribution-margin ratio = unit sales price
$10−$5
= $10 = .5
EXERCISE 7-24 (CONTINUED)

fixed expenses
3. Break-even point (in sales dollars) = contribution-margin ratio
$40,000
= .5 = $80,000
4. Let X denote the sales volume of pizzas required to earn a target net profit of
$65,000.
$10X – $5X – $40,000 = $65,000
$5X = $105,000
X = 21,000 pizzas
EXERCISE 7-29 (30 MINUTES)

1.
Sales Unit Unit
Bicycle Type Price Variable Cost Contribution Margin
High-quality $500 $300 ($275 + $25) $200
Medium-quality 300 150 ($135 + $15) 150

2. Sales mix:

High-quality bicycles........................................................................................ 25%

Medium-quality bicycles.................................................................................. 75%
 Weighted-average unit
3. = ($200  25%) + ($150  75%)
contribution margin
= $162.50
fixed expenses
4. Break-even point (in units) =
weighted-average unit contribution margin
$65,000
= = 400 bicycles
$162.50
Break-Even Sales
Bicycle Type Sales Volume Sales Price Revenue
High-quality bicycles 100 (400  .25) $500 $ 50,000
Medium-quality bicycles 300 (400  .75) 300 90,000
Total $140,000
EXERCISE 7-29 (CONTINUED)
5. Target net income:
$65,000 + $48,750
Sales volume required to earn target net income of $48,750 =
$162 .50
= 700 bicycles
This means that the shop will need to sell the following volume of each type of
bicycle to earn the target net income:
High-quality.......................................................................... 175 (700  .25)
Medium-quality.................................................................... 525 (700  .75)

EXERCISE 7-31 (25 MINUTES)

1. The following income statement, often called a common-size income statement,

provides a convenient way to show the cost structure.

Amount Percent
Revenue............................................................... $500,000 100
Variable expenses.............................................. 300,000 60
Contribution margin......................................... $200,000 40
Fixed expenses.................................................... 150,000 30
Net income.......................................................... $ 50,000 10

2.
Decrease in Contribution Decrease in
Revenue Margin Percentage Net Income
$75,000*  40%† = $30,000

*$75,000 = $500,000  15%

†
40% = $200,000/$500,000
EXERCISE 7-31 (CONTINUED)

contribution margin
3. Operating leverage factor (at revenue of $500,000)=
net income
$200,000
= =4
$50,000
 Percentage change in net income =¿ ( percentage increase ¿) ¿ ¿¿¿ ¿
4.

¿
¿
EXERCISE 7-33 (20 MINUTES)

fixed expenses
1. Break-even volume of service revenue =
contribution margin ratio
$120,000
= = $600,000
. 20
target after-tax net income
2. Target before-tax income =
1 − tax rate
$48,000
¿ = $64,000
1 − .25
EXERCISE 7-33 (CONTINUED)

target after-tax net income

fixed expenses +
3. Service revenue required to earn (1 −t )
¿
target after-tax income of $48,000 contribution margin ratio
$48,000
$120,000 +
1 − .25
¿ = $920,000
.20

4. A change in the tax rate will have no effect on the firm's break-even point. At the
break-even point, the firm has no profit and does not have to pay any income taxes.

PROBLEM 7-37 (35 MINUTES)

1. Current income:

Sales $3,360,000
revenue………………………...
Less: Variable $ 840,000
costs…………………
Fixed 2,280,000 3,120,000
costs…………………….
Net $ 240,000
income…………………………….

Advanced Electronics has a contribution margin of $60 [($3,360,000 - $840,000)

÷ 42,000 sets] and desires to increase income to $480,000 ($240,000 x 2). In
addition, the current selling price is $80 ($3,360,000 ÷ 42,000 sets). Thus:

Required sales = (fixed costs + target net profit) ÷ unit contribution

margin
= ($2,280,000 + $480,000) ÷ $60
= 46,000 sets, or $3,680,000 (46,000 sets x $80)

2. If operations are shifted to Mexico, the new unit contribution margin will be $62
($80 - $18). Thus:

Break-even point = fixed costs ÷ unit contribution margin

= $1,984,000 ÷ $62
= 32,000 units

3. (a) Advanced Electronics desires to have a 32,000-unit break-even point with

a $60 unit contribution margin. Fixed cost must therefore drop by $360,000
($2,280,000 - $1,920,000), as follows:

Let X = fixed costs

X ÷ $60 = 32,000 units
X = $1,920,000
(b) As the following calculations show, Advanced Electronics will have to
generate a contribution margin of $71.25 to produce a 32,000-unit break-
even point. Based on an $80.00 selling price, this means that the company
can incur variable costs of only $8.75 per unit. Given the current variable
cost of $20.00 ($80.00 - $60.00), a decrease of $11.25 per unit ($20.00 -
$8.75) is needed.

Let X = unit contribution margin

$2,280,000 ÷ X = 32,000 units
X = $71.25
PROBLEM 7-37 (CONTINUED

4. (a) Increase

(b) No effect

(c) Increase

(d) No effect

PROBLEM 7-38 (40 MINUTES)

1. Sales mix refers to the relative proportion of each product sold when a company
sells more than one product.

2. (a) Yes. Plan A sales are expected to total 65,000 units (45,500 + 19,500),
which
compares favorably against current sales of 60,000 units.

(b) Yes. Sales personnel earn a commission based on gross dollar sales. As
the following figures show, Deluxe sales will comprise a greater
proportion of total sales under Plan A. This is not surprising in light of
the fact that Deluxe has a higher selling price than Basic ($86 vs. $74).

Current Plan A

Sales Sales
Units Mix Units Mix

Deluxe…….. 39,000 65 45,500 70

. % %
Basic……… 21,000 35 19,500 30
. % %
Total 60,000 100 65,000 100
% %

(c) Yes. Commissions will total $535,600 ($5,356,000 x 10%), which

compares favorably against the current flat salaries of $400,000.

Deluxe sales: 45,500 units x $86… $3,913,000

Basic sales: 19,500 units x $74….. 1,443,000
Total………………………… $5,356,000
…….
PROBLEM 7-38 (CONTINUED)

(d) No. The company would be less profitable under the new plan.

Current Plan A
Sales revenue:
Deluxe: 39,000 units x $86; 45,500 units x $3,354,000 $3,913,000
$86…
Basic: 21,000 units x $74; 19,500 units x $74….. 1,554,000 1,443,000
Total $4,908,000 $5,356,000
revenue…………………………………….
Less variable cost:
Deluxe: 39,000 units x $65; 45,500 units x $2,535,000 $2,957,500
$65…
Basic: 21,000 units x $41; 19,500 units x $41….. 861,000 799,500
Sales commissions (10% of sales revenue)……. 535,600
Total variable $3,396,000 $4,292,600
cost………………………………
Contribution $1,512,000 $1,063,400
margin……………………………………..
Less fixed cost (salaries) 400,000 ----
……………………………….
Net $1,112,000 $1,063,400
income………………………………………………..
.

3. (a) The total units sold under both plans are the same; however, the sales mix
has shifted under Plan B in favor of the more profitable product as
judged by the contribution margin. Deluxe has a contribution margin of
$21 ($86 - $65), and Basic has a contribution margin of $33 ($74 - $41).

Plan A Plan B

Sales Sales
Units Mix Units Mix

Deluxe…….. 45,500 70 26,000 40

. % %
Basic……… 19,500 30 39,000 60
. % %
Total… 65,000 100 65,000 100
… % %
PROBLEM 7-38 (CONTINUED)

(b) Plan B is more attractive both to the sales force and to the company.
Salespeople earn more money under this arrangement ($549,900 vs.
$400,000) and the company is more profitable ($1,283,100 vs. $1,112,000).

Current Plan B
Sales revenue:
Deluxe: 39,000 units x $86; 26,000 units x $3,354,000 $2,236,000
$86…
Basic: 21,000 units x $74; 39,000 units x $74….. 1,554,000 2,886,000
Total $4,908,000 $5,122,000
revenue…………………………………….
Less variable cost:
Deluxe: 39,000 units x $65; 26,000 units x $2,535,000 $1,690,000
$65…
Basic: 21,000 units x $41; 39,000 units x $41….. 861,000 1,599,000
Total variable $3,396,000 $3,289,000
cost………………………………
Contribution $1,512,000 $1,833,000
margin……………………………………..
Less: Sales force compensation:
Flat 400,000
salaries…………………………………………...
Commissions ($1,833,000 x 30%) 549,900
…………………
Net income $1,112,000 $1,283,100
………………………………………………..

PROBLEM 7-41 (CONTINUED)

2. Break-even point:
contribution margin $6,000,000
Contribution-margin ratio = = =.75
sales $8,000,000
fixed expenses $3,000,000
Break-even point = =
contribution-margin ratio .75
= $4,000,000

3. Margin of = budgeted sales revenue – break-even sales revenue

safety
= $8,000,000 – $4,000,000 = $4,000,000

4. Operating leverage factor contribution margin (at budgeted sales )

(at budgeted sales) =
net income (at budgeted sales )
$6,000,000
= =2
$3,000,000
5. Dollar sales required to fixed expenses + target net profit
earn target net profit =
contribution-margin ratio
$3,000,000 + $4,500,000
¿ = $10,000,000
. 75

6. Cost structure:

Amount Percent
Sales revenue....................................................... $8,000,000 100.0
Variable expenses................................................ 2,000,000 25.0
Contribution margin........................................... $6,000,000 75.0
Fixed expenses..................................................... 3,000,000 37.5
Net income........................................................... $3,000,000 37.5
EXERCISE 8-20 (15 MINUTES)

1. a. Inventory increases by 2,000 units, so operating income is greater under

absorption costing.

b. Fixed overhead $792,000

=
rate per unit 110,000 = $7.20

Difference in
reported operating = $7.20  2,000 = $14,400
income

2. a. Inventory decreases by 5,000 units, so operating income is greater under

variable costing.

b. Fixed overhead $792,000

=
rate per unit 90,000 = $8.80

Difference in
reported operating = $8.80  5,000 = $44,000
income

3. a. Inventory remains unchanged, so there is no difference in reported operating

income under the two methods of product costing.
b. No difference.
EXERCISE 8-21 (10 MINUTES)

1. Inventoriable costs under variable costing:

Direct material used .............................................................................. $290,000

Direct labor ............................................................................................ 100,000
Variable manufacturing overhead ...................................................... 50,000
Total ....................................................................................................... $440,000

2. Inventoriable costs under absorption costing:

Direct material used .............................................................................. $290,000

Direct labor ............................................................................................ 100,000
Variable manufacturing overhead ...................................................... 50,000
Fixed manufacturing overhead ............................................................ 80,000
Total ....................................................................................................... $520,000

EXERCISE 8-22 (15 MINUTES)

Inventory calculations (units):

Finished-goods inventory, January 1 .................................................. 2,000 units

Add: Units produced ............................................................................ 20,000 units
Less: Units sold ...................................................................................... 21,000 units
Finished-goods inventory, December 31 ............................................. 1,000 units
EXERCISE 8-22 (CONTINUED)

1. Variable costing:

Inventoriable costs under variable costing:

Direct material used .............................................................................. $ 600,000

Direct labor incurred ............................................................................ 300,000
Variable manufacturing overhead ...................................................... 200,000
Total ....................................................................................................... $1,100,000

Cost per unit produced = $1,100,000/20,000 units = $55 per unit

Ending inventory: 1,000 units  $55 per unit .................................. $55,000

2. Absorption costing:
Predetermined fixed-overhead rate
fixed manufacturing overhead $ 420,000
= planned production = 20,000 units
= $21 per unit

( )( )
Difference in fixed change in predetermined
overhead expensed under
absorption and variable costing = inventory × fixed-overhead
in units rate

= (1,000 units)  ($21 per unit)

= $21,000
Difference in reported operating income:
Since inventory decreased during the year, operating income reported under
absorption costing will be $21,000 lower than operating income reported under
variable costing.
EXERCISE 8-23 (25 MINUTES)

Inventory calculations (units):

Finished-goods inventory, January 1 .................................................. 0 units

Add: Units produced ............................................................................ 10,000 units
Less: Units sold ...................................................................................... 9,000 units
Finished-goods inventory, December 31 ............................................. 1,000 units

1. Variable costing:

Inventoriable costs under variable costing:

Direct material used .............................................................................. $40,000

Direct labor incurred ............................................................................ 20,000
Variable manufacturing overhead ...................................................... 12,000
Total ....................................................................................................... $72,000

Cost per unit produced = $72,000/10,000 units = $7.20 per unit

Ending inventory: 1,000 units  $7.20 per unit ............................... $7,200

2. Absorption costing:
Predetermined fixed-overhead rate
fixed manufacturing overhead $25,000
= planned production = 10,000 units = $2.50 per unit

( ) ( )
Difference in fixed change in predetermined
overhead expensed under
absorption and variable costing = inventory × fixed-overhead
in units rate

= (1,000 units)  ($2.50 per unit)

= $2,500
Difference in reported operating income:
Since inventory increased during the year, operating income reported under
absorption costing will be $2,500 higher than operating income reported under
variable costing.
PROBLEM 8-35 (40 MINUTES)

1. Cost per unit:

(a) Absorption Costing (b) Variable Costing

Direct material ............................. $20........................................................ $20

Direct labor .................................. 11........................................................ 11
Manufacturing overhead
Variable .................................... 8........................................................ 8
Fixed ($200,000 ÷ 25,000) ....... 8
Total absorption cost per unit….. $47
Total variable cost per unit..............................................................................$39

2. a. GREAT OUTDOZE COMPANY

OPERATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1
ABSORPTION COSTING

Sales revenue (at $65 per unit) ....................................................... $1,430,000

Less: Cost of goods sold (at
absorption cost of $47 per unit) ................................................... 1,034,000
Gross margin ................................................................................... $ 396,000
Less: Selling and administrative expenses:
Variable (at $1 per unit) ..................................................... 22,000
Fixed ..................................................................................... 30,000
Operating income ............................................................................ $ 344,000
PROBLEM 8-35 (CONTINUED)

b. GREAT OUTDOZE COMPANY

OPERATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1
VARIABLE COSTING

Sales revenue (at $65 per unit) ....................................................... $1,430,000

Less: Variable expenses:
Variable manufacturing costs
(at variable cost of $39 per unit) ...................................... 858,000
Variable selling and administrative costs
(at $1 per unit) ................................................................... 22,000
Contribution margin ....................................................................... $ 550,000
Less: Fixed expenses:
Fixed manufacturing overhead .......................................... 200,000
Fixed selling and administrative costs ............................... 30,000
Operating income ............................................................................ $ 320,000

3. Change in predetermined absorption-costing income

inventory  fixed overhead = minus variable-costing
(in units) rate income

3,000 unit increase  $8 = $24,000

EXERCISE 9-23 (15 MINUTES)

1. Production (in units) required for the year:

Sales for the year........................................................................................... 480,000

Add: Desired ending finished-goods inventory on December 31............. 50,000
Deduct: Beginning finished-goods inventory on January 1...................... 80,000
Required production during the year......................................................... 450,000

2. Purchases of raw material (in units), assuming production of 500,000 finished units:

Raw material required for production (500,000  2)................................ 1,000,000

Add: Desired ending inventory on December 31....................................... 45,000
Deduct: Beginning inventory on January 1................................................ 35,000
Required raw-material purchases during the year................................... 1,010,000

EXERCISE 9-25 (20 MINUTES)

1. The total required production is 655,720 units, computed as follows:

Budgeted Sales Planned Ending Inventory

(in units) (in units)
June 160,000 (200,000  80%)
July 200,000 (given)
August 210,000 (200,000  1.05)
September 220,500 (210,000  1.05) 185,220 (231,525  80%)
October 231,525 (220,500  1.05)

Sales in units:

July................................................................................................................ 200,000
August........................................................................................................... 210,000
September.................................................................................................... 220,500
Total for third quarter................................................................................ 630,500
Add: Desired ending inventory, September 30......................................... 185,220
Subtotal........................................................................................................ 815,720
Deduct: Desired ending inventory, June 30.............................................. 160,000
Total required production.......................................................................... 655,720
EXERCISE 9-25 (CONTINUED)

2. Assumed production during third quarter (in units)............................... 600,000

Raw-material requirements per unit of product (in pounds).................  4
Raw material required for production in third quarter (in pounds)..... 2,400,000
Add: Desired ending raw-material inventory, September 30
(2,400,000  25%)................................................................................ 600,000
Subtotal........................................................................................................ 3,000,000
Deduct: Ending raw-material inventory, June 30.................................... 700,000
Raw material to be purchased during third quarter (in pounds)........... 2,300,000
Cost per pound of raw material.................................................................  $1.15
Total raw-material purchases during third quarter................................ $2,645,000

PROBLEM 9-39 (60 MINUTES)

1. Sales budget for 20x0:

Units Price Total

Light coils................................................................ 60,000 $120 $ 7,200,000
Heavy coils............................................................... 40,000 170 6,800,000
Projected sales......................................................... $14,000,000
PROBLEM 9-39 (CONTINUED)

2. Production budget (in units) for 20x0:

Light Coils Heavy Coils

Projected sales............................................................................... 60,000 40,000
Add: Desired inventories,
December 31, 20x0.................................................................... 25,000 9,000
Total requirements........................................................................ 85,000 49,000
Deduct: Expected inventories, January 1, 20x0......................... 20,000 8,000
Production required (units)......................................................... 65,000 41,000

3. Raw-material purchases budget (in quantities) for 20x0:

Raw Material
Sheet Copper
Metal Wire Platforms
Light coils (65,000 units projected
to be produced)................................................. 260,000 130,000 __
Heavy coils (41,000 units projected
to be produced)................................................. 205,000 123,000 41,000
Production requirements....................................... 465,000 253,000 41,000
Add: Desired inventories, December 31, 20x0..... 36,000 32,000 7,000
Total requirements................................................. 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x0................................................. 32,000 29,000 6,000
Purchase requirements (units).............................. 469,000 256,000 42,000

4. Raw-material purchases budget for 20x0:

Raw Material Anticipated

Required Purchase
Raw Material (units) Price Total
Sheet metal............................................................. 469,000 $8 $3,752,000
Copper wire........................................................... 256,000 5 1,280,000
Platforms................................................................ 42,000 3 126,000
Total....................................................................... $5,158,000
PROBLEM 9-39 (CONTINUED)

5. Direct-labor budget for 20x0:

Projected Hours
Productio per Total Total
n Unit Hours Rate Cost
(units)
Light coils..................................... 65,000 2 130,000 $15 $1,950,000
Heavy coils................................... 41,000 3 123,000 20 2,460,000
Total.............................................. $4,410,000

6. Production overhead budget for 20x0:

Cost
Cost Driver Driver Budgeted
Quantity Rate Cost

Purchasing and material handling...................... 725,000 lb.a $.25 $181,250

Depreciation, utilities, and inspection................. 106,000 coils b $4.00 424,000
Shipping................................................................. 100,000c $1.00 100,000
General production overhead.............................. 253,000 hr. d $3.00 759,000
$1,464,250
Total production overhead......................................
a
725,000 = 469,000 + 256,000 (from req. 3)
b
106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)
EXERCISE 10-26 (15 MINUTES)

Direct-material price variance = AQ(AP – SP)

= 4,200*($7.30 – $7.00)
= $1,260 Unfavorable
*AQ = 4,200 pounds = $30,660 ÷ $7.30 per pound

Direct-material quantity variance = SP(AQ – SQ)

= $7.00(4,200 – 4,000*)
= $1,400 Unfavorable

*
SQ = 4,000 pounds = 2,000 units  2 pounds per unit

Direct-material purchase price variance = PQ(AP – SP)

= 6,000($7.30 – $7.00)
= $1,800 Unfavorable

Direct-labor rate variance = AH(AR – SR)

= 6,450*($18.10 – $18.00)
= $645 Unfavorable

*AH = 6,450 hours = $116,745 ÷ $18.10 per hour

Direct-labor efficiency variance = SR(AH – SH)

= $18(6,450 – 6,000*)
= $8,100 Unfavorable

*SH = 6,000 hours = 2,000 units  3 hours per unit

PROBLEM 10-35 (25 MINUTES)

1. Direct-material price = (AQ  AP) – (AQ  SP)

variance
= (9,500  $1.38) – (9,500  $1.35)
= $13,110 – $12,825
= $285 Unfavorable

2. Direct-material quantity = (AQ  SP) – (SQ  SP)

variance
= (9,500  $1.35) – (10,000*  $1.35)
= $12,825 – $13,500
 = $675 Favorable

*500 units  20 yards per unit = 10,000 yards

PROBLEM 10-35 (CONTINUED)

4. Direct-labor rate = (AH  AR) – (AH  SR)

variance
= (2,100  $9.15) – (2,100  $9.00)
= $19,215 – $18,900
= $315 Unfavorable

5. Direct-labor efficiency = (AH  SR) – (SH  SR)

variance
= (2,100  $9.00) – (2,000*  $9.00)
= $18,900 – $18,000
= $900 Unfavorable

*500 units  4 hours per unit = 2,000 hours

PROBLEM 10-39 (25 MINUTES)

1. Direct-material price = (AQ  AP) – (AQ  SP)

variance
= (142,500 x $1.90*) – (142,500  $1.75)
= $270,750 – $249,375
= $21,375 Unfavorable
*Actual price = $1.90 per pound = $304,000 ÷ 160,000 pounds

2. Direct-material quantity variance = SP(AQ – SQ)

= $1.75(142,500 – 152,000*)
= $16,625 Favorable
*Standard quantity allowed = 19,000 units  8 lbs. per unit = 152,000 lbs.

4. Direct-labor rate = (AH  AR) – (AH  SR)

variance
= $37,800* – (5,000  $8.00)
= $2,200 Favorable
*90%  $42,000 = $37,800

5. Direct-labor efficiency = SR(AH – SH)

variance
= $8.00(5,000 – 4,750*)
EX = $2,000 Unfavorable
ER
CI
SE
11-
22
(20
MI
NU
TE
S)

1.

2.

3.

4.
 *19,000 units  .25 hour per unit = 4,750 hours

EXERCISE 11-26 (20 MINUTES)

1. a. Variable-overhead spending variance = actual variable overhead – (AQ 

SVR)
= $405,000 – (40,500  $9.00)
= $40,500 U

b. Variable-overhead efficiency variance = SVR(AQ – SQ)

= $9.00(40,500 – 36,000*)
= $40,500 U

*SQ = 36,000 hours. = 9,000 cases  4 hours per case

c. Fixed-overhead budget variance = actual fixed OH – budgeted fixed OH

= $122,000 – $120,000
= $2,000 U
EXERCISE 11-26 (CONTINUED)

d. Fixed-overhead volume variance = budgeted fixed OH – applied fixed OH

= $120,000 – $108,000†
= $12,000 (positive)**

†
Applied fixed overhead = ( predetermined fixed ¿ ) ¿ ¿ ¿
¿
=
( $120,000
10,000×4 )
×( 9,000×4 )

= $108,000

**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

EXERCISE 11-32 (15 MINUTES)

Variable-overhead spending variance = actual variable overhead – (AQ  SVR)

= $2,340,000 – (275,000  $8.00)
= $140,000 U

Variable-overhead efficiency = SVR (AQ – SQ)

variance
= $8.00 (275,000 – 280,000*)
= $40,000 F

*SQ = 56,000 units  5 hours per unit

Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $3,750,000 – $3,600,000*
= $150,000 U

*Budgeted fixed overhead = 300,000 hours  $12 per hour

Fixed-overhead volume = budgeted fixed overhead – applied fixed overhead

variance
= $3,600,000 – $3,360,000*
= $240,000 (positive)†

*Applied fixed overhead = $12 per hour  5 hours per unit  56,000 units
†
Consistent with the discussion in the text, we choose not to interpret the volume variance
as either favorable or unfavorable. Some accountants would designate a positive volume
variance as “unfavorable” and a negative volume variance as “favorable.”