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E20-19 Determining fixed cost per unit Learning Objective 1 90 units $52.50 For each total fixed cost listed below, determine the fixed cost per unit when sales are 45, 90, and 180 units. Store rent $ 1,800 Manager's salary 1,350 Equipment lease 900 Depreciation on fixtures 675 E20-20 Determining total variable cost Learning Objective 1 Total VC, 80 units $9,600 For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 40, 80, and 160 units. Direct materials $ 35 Direct labor 65 Variable overhead 9 Sales commission 11 E20-21 Determining total mixed cost Learning Objective 1 17,000 gal. $42.25 Robert Street Barber Shop pays $30 per month for water for the first 10,000 gallons and $1.75 per thousand gallons above 10,000 gallons. Calculate the total water cost when the barber shop uses 6,000 gallons, 12,000 gallons, and 17,000 gallons. E20-30 Computing margin of safety Learning Objective 5 1. $42,500 Ricky's Repair Shop has a monthly target profit of $17,000. Variable costs are 60% of sales, and monthly fixed costs are $8,000. Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Ricky's margin of safety as a percentage of target sales. E20-32 Calculating breakeven point for two products Learning Objective 5 2. 340 standards Stewart's Scooters plans to sell a standard scooter for $120 and a chrome scooter for $160. Stewart's purchases the standard scooter for $30 and the chrome scooter for $40. Stewart's expects to sell one standard scooter for every three chrome scooters. Stewart's monthly fixed costs are $85,500. Requirements 1. How many of each type of scooter must Stewart's Scooters sell each month to break even? 2. How many of each type of scooter must Stewart's Scooters sell each month to earn $67,500? FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition E20-19 For each total fixed cost, determine the fixed cost per unit when sales are 45, 90, and 180 units. Solution: Units sold: Store Rent $ 1,800 Managers Salary 1,350 Equipment lease 900 Depreciation on fixtures 675 Total Fixed Cost per Unit: Chapter 20: Cost-Volume-Profit Analysis 45 Units 90 Units 180 Units Page 1 of 6 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition E20-20 For each variable cost per unit, determine the total variable cost when units produced and sold are 40, 80, and 160 units. Solution: Units sold: Direct Materials Direct Labor Variable overhead Sales Commission 40 Units $ 80 Units 160 Units 35 65 9 11 Total Variable Cost: Chapter 20: Cost-Volume-Profit Analysis Page 2 of 6 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Calculate the total water cost when the barber shop uses 6,000 gallons, 12,000 gallons, and 17,000 gallons. (1.75 per 100 gal * Water usage above 10000 gal) + 30 = 6000 gal = 12000 gal = 17000 gal = Chapter 20: Cost-Volume-Profit Analysis Total Water Usage Page 3 of 6 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Rickey's margin of safety as a percentage of target sales. Requirement 1 Required sales in dollars = Fixed costs + Target Proft/contribution margin ratio = (xx + 0) / 40% = (xx + 17000) / 40% = $ xx = $xx Expected Sales - Breakeven sales = Margin of safety in dollars xx - xx = $ xx Requirement 2 Margin of safety of dollars xx / Expected sales in dollars = / Chapter 20: Cost-Volume-Profit Analysis xx Margin of safety ratio = % Page 4 of 6 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Requirements 1. How many of each type of scooter must Stewart's Scooters sell each month to break even? 2. How many of each type of scooter must Stewart's Scooters sell each month to earn $64,500? Requirement 1 Sales price per unit Variable cost per unit Contribution margin per unit Sales mix in units Contribution margin Weighted-average contribution margin per unit (xx per unit / total units) Standard Scooter xx (xx) xx *1 xx Chrome Total Scooter xx (xx) xx *3 xx units xx $xx $112.50 Required sales in units = fixed costs + target profit / contribution margin per unit = (xx + 0) / 112.50 = Required Sales of Standard Scooter = = xx units * 1/4 xx standard scooters Required Sales of Chrome Scooter = = xx units * 3/4 xx chrome scooters xx Requirement 2 Required sales in units = fixed costs + Target profit/contribution margin per unit = (xx + xx) / 112.50 Chapter 20: Cost-Volume-Profit Analysis = xx units Page 5 of 6 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Required Sales of Standard Scooter = = xx units * 1/4 xx standard scooters Required Sales of Chrome Scooter = = xx units * 3/4 xx chrome scooters Chapter 20: Cost-Volume-Profit Analysis Page 6 of 6 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ 38)_______ 39) _______ 40) _______ 41) _______ 42) _______ 43) _______ 44) _______ 45) _______ 46) _______ 47) _______ 48) _______ 49) _______ 50) _______ 51) _______ 52) _______ 53) _______ 54) _______ 55) _______ 56) _______ 57) _______ 58) _______ 59) _______ 60) _______ 61) _______ 62) _______ 63) _______ 64) _______ 65) _______ 66) _______ 67) _______ 68) _______ 69) _______ 70) _______ 71) _______ 72) _______ 73) _______ 74) _______ 75)________ 76)________ 77)________ 78)________ 79)________ 80)________ 81) Answer: Date Accounts and Explanation Dec 3 Raw and In-Process Inventory Accounts Payable Dec 8 Conversion Costs Wages Payable, Accumulated Depreciation, etc. Debit Credit Dec 15 Finished Goods Inventory Raw and In-Process Inventory Conversion Costs Dec 23 Accounts Receivable Sales Revenue Dec 23 Cost of Goods Sold Finished Goods Inventory 82) Provide answers to the following just-in-time costing questions. Just-in-Time Costing Question Just-in-Time Costing Answer When are the costs of products recorded? Which inventory accounts are used? Which accounts are used to record manufacturing costs? 83) List two types of service companies that would benefit from using activity-based management. For each company listed, state the type of cost information management needs to know. Type of service company 84) Cost information management needs to know 85) 1) Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are allocated to products. a. True b. False 2) Manufacturing overhead costs, which are also known as indirect costs, cannot be cost-effectively traced to products. a. True b. False 3) Companies calculate the predetermined overhead rate at the beginning of an accounting period using the actual values of overhead costs. a. True b. False 4) A modification of the overhead allocation method which uses a single plantwide rate, is to use multiple predetermined overhead allocation rates that have different allocation bases. a. True b. False 5) When a manufacturer changes from using a single plantwide predetermined overhead rate to multiple predetermined overhead allocation rates, the product unit cost may be more accurate. a. True b. False 6) Traditional costing provides more detailed information on costs of activities and the drivers of these costs than activity-based costing. a. True b. False 7) In the first step in developing an activity-based costing system for a manufacturing company, the management team must determine the activities that incur the majority of the manufacturing overhead costs. a. True b. False 8) In the first step in developing an activity-based costing system for a manufacturing company, the management team must determine the activities that incur the majority of the product and period costs. a. True b. False 9) The main difference between activity-based costing and traditional costing systems is that activity-based costing uses a separate allocation base for each activity. a. True b. False 10)Activity-based costing refines the cost allocation process even more than traditional allocation costing systems. a. True b. False 11)Indirect costs allocated to products using activity-based costing are more accurate than traditional allocation systems. a. True b. False 12)Activity-based management (ABM) uses activity-based costs to make decisions that increase profits while meeting customer needs. a. True b. False 13)Activity-based management (ABM) can be used to make pricing and product mix decisions. a. True b. False 14)A product mix decision focuses on generating the maximum profit for a company but does not consider the company's limited production capabilities. a. True b. False 15)Target pricing starts with the full product cost, and it then adds the desired profit to arrive at the sales price. a. True b. False 16)Activity-based management is not suitable for service companies as it deals with the proper allocation of manufacturing overhead costs. a. True b. False 17)The steps of an activity-based costing system for a service firm are significantly different from that used for a manufacturing firm. a. True b. False 18)The just-in-time management system results in an increase in the costs to buy, store, insure, and move inventory. a. True b. False 19)Just-in-time costing does not track the cost of products from Raw Materials Inventory to Work-in-Process Inventory to Finished Goods Inventory. a. True b. False 20)Under just-in-time costing, the purchase of raw materials is recorded by debiting the Raw Materials Inventory account. a. True b. False 21)Total variable costs change in direct proportion to changes in the volume of production. a. True b. False 22)If the volume of activity doubles in the relevant range, total variable costs will also double a. True b. False 23)Fixed costs per unit decrease as production levels decrease. a. True b. False 24)During the current year, Simpson, Inc. incurred $9,000 in fixed costs and $13,000 in variable costs. If the number of units produced is halved next year, the company will incur $4,500 as fixed costs and $6,500 as variable costs. a. True b. False 25)The high-low method requires the identification of the lowest and highest levels of total costs, not activity, over a period of time. a. True b. False 26)Contribution margin is the difference between net sales revenue and variable costs. a. True b. False 27)If the sales price of Product X is $24.00 per unit and unit fixed cost is $7.50, its contribution margin per unit is $16.50. a. True b. False 28)Because contribution margin is based on sales price and variable costs, the ratio can be calculated using either the total amounts or the unit amounts. a. True b. False 29)Contribution margin is the amount that contributes to covering the fixed costs and then to providing operating income. a. True b. False 30)The breakeven point is the point where the sales revenues are equal to the fixed costs. a. True b. False 31)The fundamental assumption of cost-volume-profit (CVP) analysis is that, in the long run, fixed costs become variable costs. a. True b. False 32)Target profit can be determined by using the contribution margin, contribution margin ratio, or break even approach. a. True b. False 33)The sales level at which operating income is zero is called the breakeven point a. True b. False 34)Fixed costs divided by the contribution margin ratio equals the breakeven point in sales dollars. a. True b. False 35)The breakeven point is the point where the sales revenues are equal to the total variable costs plus the total fixed costs. a. True b. False 36)An increase in sales price per unit increases the number of units required to break even. a. True b. False 37)When the variable cost per unit decreases, the contribution margin on each unit sold also decreases. a. True b. False 38)Higher fixed costs increase the total number of units required to break even. a. True b. False 39)The amount by which sales can decrease before the company incurs an operating loss is called breakeven point. a. True b. False 40)If variable costs increase, and all other factors remain the same, the margin of safety will become smaller. a. True b. False Multiple choice questions, worth 2pts each: To maximize your points please show ALL work 80 41) Which of the following statements is true? A) Indirect costs must be allocated based on a single plant wide rate. B) Manufacturing overhead costs are accumulated in cost pools and then assigned to products. C) Managers cannot wait until the end of the accounting period for product cost information. D) Managers can choose to wait until the end of the accounting period to allocate manufacturing overhead costs. 42)Modiste, Inc. manufactures two kinds of bagstotes and satchels. The company allocates manufacturing overhead using a single plantwide rate with direct labor cost as the allocation base. Estimated overhead costs for the year are $24,000. Additional estimated information is given below. Totes Satchels Direct materials cost per unit Direct labor cost per unit Number of units $33 $50 530 $43 $61 380 Calculate the predetermined overhead allocation rate. (Round your answer to two decimal places.) A) 90.57% B) 48.31% C) 96.58% D) 1.36% Hint: Predetermined overhead allocation rate = Total estimated overhead costs / Total estimated quantity of the overhead allocation base 43)A furniture corporation manufactures two models of furnitureStandard and Deluxe. The total estimated manufacturing overhead costs are $64,300. The following estimates are available: Direct materials cost per unit Direct labor cost per unit Number of units Standard Deluxe $240 $120 250 $280 $135 500 The company uses direct labor costs as the base to allocate manufacturing overhead. Calculate the predetermined overhead rate. (Round your answer to two decimal places.) A) 32.15% B) 33.84% C) 190.52% D) 65.95% 44) A furniture manufacturer has decided that its use of a single plantwide predetermined overhead allocation rate is no longer accurate. In making the transition to using multiple predetermined overhead allocation rates, which of the following statements is incorrect? A) In selecting machine usage as the primary cost driver for the Production Department, management feels that there is a direct relationship between the number of machine hours used and the amount of overhead costs incurred. B) Management must analyze the expected overhead costs and separate them into a cost pool for each department. C) The allocation process changes because there are now multiple cost pools and multiple allocation bases. D) The use of multiple predetermined overhead allocation rates is more complex, but it may be more accurate. 45)An activity-based costing system is developed in four steps: a. Compute the predetermined overhead allocation rate for each activity. b. Identify activities and estimate their total costs. c. Identify the cost driver for each activity and then estimate the quantity of each driver's allocation base. d. Allocate the indirect costs to the cost object. Which of the following is the correct order for performing these steps? A) a, b, c, d B) c, a, b, d C) b, c, a, d D) b, a, c, d 46) Which of the following would most likely be treated as an activity in an activity-based costing system? A) direct labor cost B) machine processing C) direct materials cost D) sales revenues 47) For a pharmaceutical company, the most suitable base for allocating research and development costs to the finished products would be the ________. A) direct labor hours B) cost of raw materials purchased C) number of new patents filed D) number of set ups 48) Which of the following statements is true of an activity-based costing system? A) It uses separate predetermined overhead allocation rates for each activity. B) It is not as accurate or precise as traditional costing systems. C) It accumulates overhead costs by processing departments. D) It is not as complex or as costly as traditional systems. 49) Reichert Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan has 20 separate parts. The direct materials cost is $95, and each ceiling fan requires 3.00 hours of machine time to manufacture. Additional information is as follows: Activity Materials handling Machining Assembling Packaging Allocation Base Number of parts Machine hours Number of parts Number of finished units Predetermined Overhead Allocation Rate $ 0.05 6.00 0.40 2.10 What is the cost of machining per ceiling fan? (Round any intermediate calculations and your final answer to the nearest cent.) A) $18.00 B) $95.00 C) $120.00 D) $199.50 50) Which of the following statements is true of costing systems? A) Many traditional costing systems can distort product costs and profitability. B) Traditional costing systems tend to be more costly than activity-based costing systems. C) Activity-based costing systems tend to combine various costs into a single cost pool. D) Activity-based costing systems tend to use fewer cost pools than does a traditional costing system. 51) Which of the following decisions will most likely involve the use of activity-based management? A) decisions related to the financing of an investment using equity or debt B) decisions related to the expansion operations in a particular geographic location C) decisions related to the pricing of a product D) decisions related to the payment of dividends 52) A company is most likely to use value engineering ________. A) to allocate manufacturing overhead to departments B) to reduce costs in order to achieve target costs C) to determine accurate product costs for pricing D) to make product mix decisions 53) Which of the following is a nonmanufacturing cost? A) direct labor B) direct materials C) administrative expenses D) indirect labor 54) Phoenix, Inc. manufactures widgets. The target sales price is $440 per unit. The company desires a 40% net profit margin on its products. What is the company's target full-product cost per unit using target pricing? A) $176 B) $616 C) $704 D) $264 55) J-Time, Inc. is planning to launch a new brand of watches for kids. Similar watches are available in the market for $58. In order to penetrate the market, the company plans to use target pricing and desires a 22% net profit markup on total cost. Calculate the target cost. (Round your answer to the nearest cent.) A) $70.76 B) $12.76 C) $47.54 D) $45.24 Hint: Let target cost be x Target cost = Target sales price - Desired profit 56) ________ in just-in-time management systems is completed in self-contained work cells. A) Selling B) Production C) Administration D) Purchasing 57) Which of the following statements is true of the just-in-time costing system? A) It increases the need for suppliers to deliver raw materials on time. B) It records summary journal entries before the units are purchased. C) It results in increased inventory storage costs. D) It increases the risk of the inventory becoming obsolete or unsalable. Answer: A 58) Which of the following is a disadvantage of a just-in-time management system? A) It results in a decrease in production space. B) It increases the inventory cost. C) The risk of the inventory becoming obsolete is very high. D) The users of this system sometimes lose sales because of little or no inventory buffers. 59) Just-in-time costing is also known as ________. A) job costing B) batch costing C) backflush costing D) process costing 60) Under the just-in-time costing system, a credit purchase of raw materials is recorded by ________. A) debiting the Raw Materials Inventory account B) crediting the Conversion Costs account C) debiting the Raw and In-Process Inventory account D) crediting the Cash account 61) Which of the following is a variable cost? A) property taxes B) salary of plant manager C) direct materials cost D) straight-line depreciation expense 62) The fixed costs per unit will ________. A) increase as production decreases B) decrease as production decreases C) remain the same as production levels change D) increase as production increases 63) A 15% increase in production volume will result in a ________. A) 15% increase in the variable cost per unit B) 15% increase in total mixed costs C) 15% increase in total administration costs D) 15% increase in total variable costs 64) Which of the following statements is true of the behavior of total fixed costs, within the relevant ange? A) They will remain the same as production levels change. B) They will increase as production decreases. C) They will decrease as production decreases. D) They will decrease as production increases. 65) Costs that have both variable and fixed components are called ________. A) fixed costs B) variable costs C) mixed costs D) contribution costs 66) Left Hand, Inc. has fixed costs of $400,000. Total costs, both fixed and variable, are $550,000 when 40,000 units are produced. Calculate the total costs if the volume increases to 64,000 units. (Round any intermediate calculations to the nearest cent, and your final answer to the nearest dollar.) A) $950,000 B) $150,000 C) $640,000 D) $550,000 67) The relevant production range for Orleans Trailers, Inc. is between 130,000 units and 180,000 units per month. If the company produces beyond 180,000 units per month, ________. A) the fixed costs will remain the same, but the variable cost per unit may change B) the fixed costs may change, but the variable cost per unit will remain the same C) the fixed costs and the variable cost per unit will not change D) both the fixed costs and the variable cost per unit may change 68) Prudence Company incurs both fixed and variable production costs. Assuming that production is within the relevant range, if volume goes up by 28%, then the total fixed costs would ________. A) increase by 28% B) remain the same C) increase by an amount less than 28% D) decrease by 28% . 69) The high-low method is used to ________. A) determine the highest price that can be charged for a product B) separate mixed costs into their variable and fixed components C) identify the relevant and irrelevant costs of a business D) determine the sales level at highest capacity 70) Kamal Company incurs both fixed and variable production costs. Assuming that production is within the relevant range, if volume goes up by 20%, then the total costs would ________. A) increase by 20% B) remain the same C) increase by an amount less than 20% D) decrease by 20% 71) When the total variable costs are deducted from total mixed costs, we obtain ________. A) mixed cost per unit B) variable cost per unit C) total high-low costs D) total fixed costs 72) Which of the following is the correct formula for calculating total mixed cost? A) Total mixed cost = (Variable cost per unit / Number of units) + Total fixed cost B) Total mixed cost = (Variable cost per unit Number of units) - Total fixed cost C) Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost D) Total mixed cost = (Variable cost per unit / Number of units) - Total fixed cost 73) Contribution margin ratio is equal to ________. A) fixed costs divided by contribution margin per unit B) net sales revenue per unit minus variable costs per unit C) net sales revenue minus variable costs D) contribution margin divided by net sales revenue 74) One of the assumptions of cost-volume-profit (CVP) analysis is that there are no changes in the ________. A) accounts payable B) cash balance C) inventory levels D) account receivables 75) Maywood Company sells hand-knit scarves. Each scarf sells for $40. The company pays $60 to rent vending space for one day. The variable costs are $15 per scarf. How many scarves should the company sell each day in order to break even? (Round your answer up to the nearest whole scarf.) A) 2 scarves B) 3 scarves C) 20 scarves D) 4 scarves 76) ________ is a "what if" technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change. A) High-low method of analysis B) Sensitivity analysis C) Contribution margin D) Operating leverage 77) When the sales price per unit decreases, the breakeven point ________. A) increases B) decreases C) remains the same D) decreases proportionately 78) When the total fixed costs increase, the contribution margin per unit ________. A) increases B) decreases C) increases proportionately D) remains the same 79) When the total fixed costs decrease, the breakeven point ________. A) increases B) decreases C) remains the same D) increases proportionately 80) Operating leverage predicts the effects that fixed costs have on changes in operating income when ________. A) production is discontinued B) there are no sales returns C) variable costs change D) sales volume changes Essay Problems: Worth 10 pts each. (Please complete all problems to maximize your points and show all work) I have provided multiple hints for you to help with the process. 40 81) Caprice, Inc. has adopted a JIT management system and has the following transactions in December: Dec 3 Purchased raw materials on account, $80,000 Dec 8 Incurred labor and overhead costs, $105,000 Dec 15 Completed 750 units with standard costs of $106 for direct materials and $165 for conversion costs Dec 23 Sold 650 units for $395 each Record the journal entries for Caprice, Inc. for December. Answer: Date Accounts and Explanation Dec 3 Raw and In-Process Inventory Accounts Payable Debit Credit Dec 8 Conversion Costs Wages Payable, Accumulated Depreciation, etc. Dec 15 Finished Goods Inventory Raw and In-Process Inventory Conversion Costs Dec 23 Accounts Receivable Sales Revenue Dec 23 Cost of Goods Sold Finished Goods Inventory 82) Provide answers to the following just-in-time costing questions. Just-in-Time Costing Question Just-in-Time Costing Answer When are the costs of products recorded? Which inventory accounts are used? Which accounts are used to record manufacturing costs? 83) List two types of service companies that would benefit from using activity-based management. For each company listed, state the type of cost information management needs to know. Type of service company Cost information management needs to know 84) Daytona Manufacturer produces flooring material. The monthly fixed costs are $10,000 per month. The unit sales price is $75, and variable cost per unit is $35. Daytona wishes to earn an operating income of $25,000. Using the contribution margin ratio, calculate the total sales revenue that is needed. (Round intermediate calculations to five decimal places.) Hint: Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio Unit contribution margin = Net sales revenue per unit - Variable costs per unit Contribution margin ratio = Contribution margin / Net sales revenue 85) Andres Napkin Company sells a product for $80 per unit. Variable costs are $25 per unit, and fixed costs are $4,000 per month. Andres sold 2,000 units in October. Prepare an income statement for October using the contribution margin format