# A325 Exam 1 review Spring, 2010

Size: px
Start display at page: Transcription

1 A325 Exam 1 review Spring, 2010 The exam is seven problems (each with subsidiary questions) and you have ONE HOUR AND FIFTEEN minutes (1:15) to complete it. You are permitted to bring one page of notes with whatever you wish on them but you must be able to read them without any special mechanism. The exam has no multiple-choice questions. You MUST show your work to receive credit. Here is a summary of the questions and a reference to similar material when such exists. 1. A chapter 3 problem with fill in the unknowns. Most like 3-53 (solution attached to this document). 2. Overhead application and proration of over- or under-applied overhead. This problem is most like question 4-32 in the book (solution attached to this document). 3. Job-Order costing. This problem is most like problem 4-41 in the book (solution attached to this document). 4. Activity-based costing. This problem is most like questions 8-13 from quiz Cost estimation using regression and activity analysis (ABC). This question is almost EXACTLY like Peterson s catering. 6. Cost-Volume-Profit. This is much like CVP problems covered in class (ECAT examples). 7. Cost-Volume-Profit with multiple products. You must understand how to compute break-even and target profit when the sales mix is fixed. Most like ECAT examples from class.

2 3-53 Cost of Goods Manufactured, Calculating Unknowns Case A 1. Direct materials used \$18,000 + Direct labor 15,000 + Manufacturing overhead 20,000 Total manufacturing costs \$53, Sales \$100,000 - Cost of goods sold -? = \$75,000 Gross margin \$25, Beginning finished goods \$ 15,000 + Cost of goods manufactured +? = \$76,000 - Ending finished goods -16,000 Cost of goods sold 75, Beginning work in process? = \$30,000 + Total manufacturing costs +53,000 - Ending work in process - 7,000 Cost of goods manufactured \$76, Gross margin \$25,000 - Selling and administrative expenses -? = \$15,000 Operating income \$10,000 Case B 1. Sales? = \$46,000 - Cost of Goods sold - 43,000 Gross margin \$ 3, Finished goods inventory \$ 8,000 + Cost of goods manufactured +45,000 - Finished goods inventory -? = \$10,000 Cost of goods sold \$43,000

3 Problem 3-53 (continued) 3. + Direct labor + 9,000 + Manufacturing overhead +? = \$ 18,000 Total manufacturing costs \$35, Total manufacturing costs \$35,000 + Work in process inv., Jan. 14,000 - Work in process inv., Dec. -? = \$4,000 Cost of goods manufactured \$45,000

4 Predetermined Factory Overhead Rate = \$568,000 / 71,000 = \$8 per direct labor-hour 2. Applied Overhead = \$8 x 71,500 = \$572,000 Actual Overhead 582,250 Underapplied Overhead \$10, Applied Overhead remaining in: Work-in-Process Inv. \$139,000 25% Finished Goods Inv. 216,840 39% Cost of Goods Sold 200,160 36% \$556, % Proration: Work-In-Process Inv. 25% x \$10,250 = \$ 2, Finished Goods Inv. 39% x \$10,250 = \$ 3, Cost of Goods Sold 36% x \$10,250 = \$ 3,690.00

5 Predetermined Overhead Rate = \$ 120,000 / 8,000 = \$15 per DL hour 1. Journal Entries a. Materials Inventory 90,000 Accounts Payable 90,000 b. Work-in-Process Inventory- Job S10 23,000 Work-in-process Inventory - Job C20 42,000 Work-in-Process Inventory - Job M54 22,000 Factory Overhead 4,000 Materials Inventory 91,000 c. Work-in-Process Inventory- Job S10 6,110 Work-in-Process Inventory- Job C20 4,030 Work-in-Process Inventory- Job M54 1,820 Factory Overhead 2,500 Salary Expense (S & A) 6,000 Accrued Payroll 20,460 d. Factory Overhead 2,200 Depreciation Expense (S & A) 1,700 Accumulated Depreciation 3,900 e. Advertising Expense (S & A) 6,000 Cash 6,000 f. Factory Overhead 1,300 Accounts Payable (or Cash) 1,300 g. Factory Overhead 1,600 Accounts Payable (or Cash) 1,600 h. Work-in-Process Inventory 13,800 Factory Overhead Applied 13,800 Applied Overhead = \$15 x 920 hours = \$13,800

6 4-41 (Continued) i. Finished Goods Inventory-Job S10 46,660 Work-in-Process Inventory- Job S10 46,660 \$6,110 / \$13 = 470 direct labor-hours \$10,500 + \$23,000 + \$6,110 + (\$15 x 470) = \$46,660 j. Accounts Receivable 59,000 Sales 59,000 Cost of Goods Sold 54,000 Finished Goods Inventory - Job J21 54,000 k. Cash 25,000 Accounts Receivable 25, Ending balance of the Materials Inventory = Beginning balance + Purchases - Uses = \$27,000 + \$90,000 - \$91,000 = \$26, Ending balance of the Work-in-Process Inventory = Job C20 Cost + Job M54 Cost = (Direct Materials + Direct Labor + Applied Overhead) of 2 jobs = (\$42,000 + \$22,000) + (\$4,030 + \$1,820) + \$15 x ( ) = \$64,000 + \$5,850 + \$6,750 = \$76,600 where direct labor-hours for Job C20 = \$4,030 / \$13 = 310 hours for Job M54 = \$1,820 / \$13 = 140 hours Alternative approach: Ending WIP = Beginning WIP + DM + DL + Applied OH - FG = \$10,500 + (\$23,000 + \$42,000 + \$22,000) + (\$6,110 + \$4,030 + \$1,820) + \$13,800 - \$46,660 = \$76, Actual Overhead = \$4,000 + \$2,500 + \$2,200 + \$1,300 + \$1,600 = \$11,600 \$11,600 (Actual) - \$13,800 (Applied) = \$2,200 Overapplied Overhead

7 Example 1 ECAT manufactures printed circuit boards, which sell for \$4 per board. They have variable costs of \$1 for each board produced (including materials and variable overhead costs) and fixed costs of \$100,000 per month. Currently they are selling 40,000 boards per month. a. What is ECAT s break-even in units? What is their break-even in dollars? b. What is their current operating income (before taxes)? c. How many boards must they sell in order to earn \$100,000 before taxes? d. How many boards must they sell in order to earn \$90,000 after taxes? e. Suppose ECAT is selling 40,000 units and that the selling price is fixed at \$4. What unit variable cost must they achieve in order to earn operating income of \$35,000? a X BE = FC UCM = 100,000 = 33,334 units 3 TR BE = X BE *USP = 33,334 * 4 = \$133,336 this also equals FC CMR = 100,000 = \$133,333 3/4 b. Current operating income: ( 4! 1)40, ,000 = \$20,000 c. X 100,000 = FC + 100,000 UCM = 200,000 3 = 66,667 units d. e. 4! uvc ( )40,000! 100,000 = \$35,000 uvc =.625

8 Example 2 Suppose ECAT can spend \$10,000 on advertising and increase sales by 10% (above the 40,000 level). a. Should ECAT purchase the advertising? b. What is the minimum increase in sales to make this investment worthwhile? a. Current profit = \$20,000 (see above) If they spend the \$10,000, their sales increase by 10% (4,000 units) to 44,000 units. Their new profit is: ( 4! 1)44, ,000 = \$22,000 which is greater than the current profit, so they SHOULD advertise. b. They must earn at least their current profit of \$20,000. Therefore, they would require an X (number of units) such that: ( 4! 1) X! 110,000 = \$20,000. Solving this for X gives X = 43,334. That is an increase of 3,334 units or 8.33% of the original 40,000 units. Example 3 Suppose that ECAT can reduce the selling price by 10% and increase sales by 10,000 units. Should they reduce the selling price? Current profit is \$20,000. Reducing the selling price makes the new selling price \$3.60 (= \$4 10%(4)) and the new sales amount is 50,000 units. Profit is: (3.60 1)50, ,000 = \$30,000. That is a \$10,000 increase in profit. Example 4 Suppose ECAT can choose from the following two operating cost structures: UVC 1 = \$1 FC 1 = \$100,000 UVC 2 = \$3 FC 2 = \$30,000 If the USP is \$4, what is the optimal structure at various levels of activity and sales? The selling price is the same regardless of the cost structure. Let s figure out what the optimal cost structure is for different numbers of units. The cost structures have the same total cost if \$100,000 + \$1 X = \$30,000 + \$3 X. This is true at 35,000 units. Below 35,000 units, the cost structure with the lower fixed cost has a lower cost and above 35,000 units, the cost structure with the lower uvc has a lower total cost. 35,000 units is the same as \$140,000. So for sales below \$140,000, we would prefer cost structure 2 (\$30,000 + \$3 X) and above \$140,000, we would prefer cost structure 1 (\$100,000 + \$1 X).

9 Example 5 Suppose that ECAT s fixed costs are \$100,000 (as above) up to a level of activity of 20,000 units, at which point the Fixed costs increase to \$140,000. At a level of 40,000 units, the fixed costs jump to \$180,000. At a level of 60,000 units, the fixed costs jump to \$220,000, and so forth. How many units must ECAT produces and sell in order to break-even. How many units must ECAT produce and sell in order to earn \$35,000? We did not do this one. Example 6 Suppose that ECAT makes two products PB1 and PB2. They have selling prices of \$4 and \$6 per board respectively and unit variable costs of \$1 and \$2 respectively. For every 10 units of PB1 that ECAT sells, they sell 6 units of PB2. How many units of PB1 and PB2 must ECAT sell in order to break-even? Consider the sales in terms of a new product a bundle of 10 units of PB1 and 6 units of PB2. Each unit of PB1 has a UCM of \$4 - \$1 = \$3 and each unit of PB2 has a UCM of \$6 - \$2 = 4. A bundle will have a UCM (the contribution margin for ONE bundle) of \$3 X 10 units of PB1 + \$4 X 6 units of PB2 = \$30 + \$24 = \$54. The fixed cost is \$100,000, so the break-even point in bundles is: X BE(bundles) = 100,000 = 1,852 bundles. Since each bundle has 10 units of PB1 and 6 units 54 of PB2, that means the break-even point is 18,520 units of PB1 AND 11,112 units of PB2.