ACCT-312: Class Exercises (Chapter 2)

Sweetum candies manufacturer jaw- breakers. 1, sweetum’s current annual range of output. 2.
Current annual fixed manufacturing cost within the relevant range? Annual variable
manufacturing cost? 3. Range of output be next year.

Monthly Annual
1] Relevant Range 4,100 49,200

2] Other Fixed 1,200.00 14,400.00

Depreciation 75.00 900.00
Annual Fixed 1,275.00 15,300.00

3,800
0.30
Annal Variable Cost $ 1,140 $ 13,680
 
Total Annual Cost 28,980.00
             

Monthly Annual
3] Relevant Range 8,200 98,400

Other Fixed 1,200.00 14,400.00

 Depreciation 75.00 900.00
Annual Fixed 1,275.00 15,300.00

7,600
0.27
Annal Variable Cost $ 2,052 $ 24,624 3.24
 
Total Annual Cost 39,924.00

A studen association has hired a band and a caterer for a graduation. 2. Suppose 100 people attend the
party. What is the total cost of the student association? What is the cost per person.

Exercise 2-26

2] Quantity Qty 100

(Variable cost per person = $9
Catering (Variable) 100 $400 - $5)
Catering (Fixed) $600
Band (Fixed) $1,000
Total Cost: $2,000

Cost per Person:   $20

           

3] Quantity Qty 100

(Variable cost per person = $9
Catering (Variable) 500 $2,000 - $5)
 Catering (Fixed) $600
Band (Fixed) $1,000
Total Cost: $3,600

Cost per Person:   $7.20

           

3. suppose 500 people attend the party. What is the total cost to the student association and
the cost per attendee?
Computing cost of goods purchased and cost of goods sold. The following data are from marvin
department store. 1. Compute a; cost of goods purchased b; the cost of goods sold. 2. Prepare
the income statement for 2011.

Problem 2-29

1A] Purchases   $155,000

+ Transport-in   $7,000
- Returns & Allowances   ($4,000)
- Discounts   ($6,000)
= Net Purchases   $152,000
       

1B] Beginning Inventory   $27,000

+ Purchases (Net)   $152,000
- Ending Inventory   ($34,000)
= COGS   $145,000
       
 2] Sales Revenue   $280,000
- COGS   ($145,000)
= Gross Margin   $135,000
Less: Expenses
Marketing Exp. $37,000  
Utilities $17,000  
General & Admin. $43,000  
Miscellaneous $4,000  
Total Expenses:   ($101,000)
= Net Income   $34,000
       
 Chapter 3
ACCT-312: Chapter 3 Exercises:

Garret manufacturing sold 410,000 units of its product for $68 per unit in 2011. Variable cost per unit is
$60 and total fixed costs are $1,640,000. Calculate contribution margin. B, operating income.

CVP computations.

1a. Sales ($68 per unit × 410,000 units) $27,880,000

Variable costs ($60 per unit × 410,000 units) 24,600,000

Contribution margin $ 3,280,000

1b. Contribution margin (from above) $3,280,000

Fixed costs 1,640,000

Operating income $1,640,000

2a. Sales (from above) $27,880,000

Variable costs ($54 per unit × 410,000 units) 22,140,000

Contribution margin $ 5,740,000

2b. Contribution margin $5,740,000

Fixed costs 5,330,000

 Operating income $ 410,000

3. Operating income is expected to decrease by $1,230,000 ($1,640,000 − $410,000) if Ms.

Schoenen’s proposal is accepted.
The management would consider other factors before making the final decision. It is
likely that product quality would improve as a result of using state of the art equipment. Due to
increased automation, probably many workers will have to be laid off. Garrett’s management
will have to consider the impact of such an action on employee morale. In addition, the proposal
increases the company’s fixed costs dramatically. This will increase the company’s operating
leverage and risk.

Sunny spot travel agency specializes in fights between toronto and jamaica. It books passengers on
canadian air. 1. Sunny spot variable costs are, commission on ticket price. 2.

1a. SP = 6% × $1,500 = $90 per ticket

VCU = $43 per ticket

CMU = $90 – $43 = $47 per ticket

FC = $23,500 a month

FC $23,500
Q = = $47 per ticket
CMU

= 500 tickets
 FC  TOI $23,500  $17,000
1b. Q = = $47 per ticket
CMU

$40,500
= $47 per ticket

= 862 tickets (rounded up)

2a. SP = $90 per ticket

VCU = $40 per ticket

CMU = $90 – $40 = $50 per ticket

FC = $23,500 a month

FC $23,500
Q = = $50 per ticket
CMU

= 470 tickets

FC  TOI $23,500  $17,000

2b. Q = = $50 per ticket
CMU

$40,500
= $50 per ticket

= 810 tickets

3a. SP = $60 per ticket

VCU = $40 per ticket

 CMU = $60 – $40 = $20 per ticket

FC = $23,500 a month

FC $23,500
Q = = $20 per ticket
CMU

= 1,175 tickets

FC  TOI $23,500  $17,000

3b. Q = = $20 per ticket
CMU

$40,500
= $20 per ticket

= 2,025 tickets

The reduced commission sizably increases the breakeven point and the number of tickets
required to yield a target operating income of $17,000:

6%

Commission Fixed

(Requirement 2) Commission of $60

Breakeven point 470 1,175

Attain OI of $10,000 810 2,025

4a. The $5 delivery fee can be treated as either an extra source of revenue (as done below)
or as a cost offset. Either approach increases CMU $5:

SP = $65 ($60 + $5) per ticket

VCU = $40 per ticket

CMU = $65 – $40 = $25 per ticket

FC = $23,500 a month
 FC $23,500
Q = = $25 per ticket
CMU

= 940 tickets

FC  TOI $23,500  $17,000

4b. Q = = $25 per ticket
CMU

$40,500
= $25 per ticket

= 1,620 tickets

The $5 delivery fee results in a higher contribution margin which reduces both the breakeven
point and the tickets sold to attain operating income of $17,000.
Doral company manufactures and sells pens. 1a. what is the current annual operating income. B. what is
the present breakeven point in revenues. 2. Compute new operating income for each of the following
changes. Compute the new breakeven point in units for each of the following changes.

1a. [Units sold (Selling price – Variable costs)] – Fixed costs = Operating income

[5,000,000 ($0.50 – $0.30)] – $900,000 = $100,000

1b. Fixed costs ÷ Contribution margin per unit = Breakeven units

$900,000 ÷ [($0.50 – $0.30)] = 4,500,000 units

Breakeven units × Selling price = Breakeven revenues

4,500,000 units × $0.50 per unit = $2,250,000

or,

Selling price -Variable costs

Contribution margin ratio = Selling price

$0.50 - $0.30
= = 0.40
$0.50

Fixed costs ÷ Contribution margin ratio = Breakeven revenues

$900,000 ÷ 0.40 = $2,250,000

2. 5,000,000 ($0.50 – $0.34) – $900,000 = $ (100,000)

3. [5,000,000 (1.1) ($0.50 – $0.30)] – [$900,000 (1.1)] = $ 110,000

4. [5,000,000 (1.4) ($0.40 – $0.27)] – [$900,000 (0.8)] = $ 190,000

5. $900,000 (1.1) ÷ ($0.50 – $0.30) = 4,950,000 units

6. ($900,000 + $20,000) ÷ ($0.55 – $0.30) = 3,680,000 units

3.21 CVP analysis, income taxes. Brooke motors is a small dealership. 1. How many cars must brooke
motors sell each month to break even? 2. What is its target monthly operating income? How many cars
must be sold each month to reach the target monthly net income of $51,000.

CVP analysis, income taxes.

1. Monthly fixed costs = $48,200 + $68,000 + $13,000 = $129,200

Contribution margin per unit = $27,000 – $23,000 – $600 = $ 3,400

Monthly fixed costs $129,200

Breakeven units per month = = = 38 cars
Contribution margin per unit $3,400 per car

2. Tax rate 40%

Target net income $51,000

Target net income $51,000 $51,000

Target operating income =    $85,000
1 - tax rate (1  0.40) 0.60
Quantity of output units Fixed costs + Target operating income  $129, 200  $85,000 
required to be sold = Contribution margin per unit $3, 400
63 cars

The express banquet has 2 restaurants that are opened 24 hours a day. Compute the revenues need to
earn the target net income. 2. How many customers are need to breakeven. To earn net income 107,100

3. compute net income if number of customers

3-22 CVP analysis, income taxes.

1. Variable cost percentage is $3.40  $8.50 = 40%

Let R = Revenues needed to obtain target net income
$107,100
R – 0.40R – $459,000 =
1  0.30
0.60R = $459,000 + $153,000
R = $612,000  0.60
R = $1,020,000

Fixed costs + Target operating income

or,    Target revenues 
Contribution margin percentage
Target net income $107,100
Fixed costs + $459, 000 
Target revenues  1  Tax rate  1  0.30  $1, 020, 000
Contribution margin percentage 0.60

Proof: Revenues $1,020,000

Variable costs (at 40%) 408,000
Contribution margin 612,000
Fixed costs 459,000
Operating income 153,000
Income taxes (at 30%) 45,900
Net income $ 107,100

2.a. Customers needed to break even:

Contribution margin per customer = $8.50 – $3.40 = $5.10
Breakeven number of customers = Fixed costs  Contribution margin per customer
= $459,000  $5.10 per customer
= 90,000 customers

2.b. Customers needed to earn net income of $107,100:

Total revenues  Sales check per customer
 $1,020,000  $8.50 = 120,000 customers

3. Using the shortcut approach:

 Change in   Unit 
Change in net income =  number of    contribution    1  Tax rate 
 customers   margin 
   
= (170,000 – 120,000)  $5.10  (1 – 0.30)
= $255,000  0.7 = $178,500
New net income = $178,500 + $107,100 = $285,600

Alternatively, with 170,000 customers,

Operating income = Number of customers  Selling price per customer
– Number of customers  Variable cost per customer – Fixed costs
= 170,000  $8.50 – 170,000  $3.40 – $459,000 = $408,000
Net income = Operating income × (1 – Tax rate) = $408,000 × 0.70 = $285,600

The alternative approach is:

Revenues, 170,000  $8.50 $1,445,000
Variable costs at 40% 578,000
Contribution margin 867,000
Fixed costs   459,000
Operating income 408,000
Income tax at 30% 122,400
Net income $ 285,600

Suppose doral corp’s. breakeven point in revenues of $1,100,000/ compute the contribution margin
percentage. 2. Compute the selling price if variable costs are $16 per unit. 3. Suppose 95,000 units are
sold. Compute the margin of safety in units and dollars.

3-24 CVP analysis, margin of safety.

Fixed costs
1. Breakeven point revenues = Contribution margin percentage
 $660,000
Contribution margin percentage = = 0.60 or 60%
$1,100,000
Selling price  Variable cost per unit
2. Contribution margin percentage = Selling price

SP  $16
0.60 =
SP

0.60 SP = SP – $16

0.40 SP = $16

SP = $40

3. Breakeven sales in units = Revenues ÷ Selling price = $1,100,000 ÷ $40 = 27,500 units

Margin of safety in units = Sales in units – Breakeven sales in units

= 95,000 – 27,500 = 67,500 units

Revenues, 95,000 units  $40 $3,800,000

Breakeven revenues 1,100,000

Margin of safety $2,700,000

Additional Explanation:

Note: At the break-even point, you can re-write the Contribution Margin % Formula as shown:

Selling price  Variable cost per unit

Contribution margin percentage = Selling price

Since you already know that the contribution margin is 60%, you must now use algebra to solve
the equation where VC = $16

SP  $16
0.60 =
SP

SP - 0.60 SP = $16

.40SP = $16
 SP = $16 / .40

SP = $40

-27 Sales mix, new and upgrade customers.

What is the data 1-2-3, 5.0 breakeven point in units, assuming that the planned
60%:40% sales mix is attained.

2. if the sales mix is attained, what is the operation income when 220,000 total
units are sold?
3. show how the breakeven point in units changes with the following customer
mixes.

1.

New Upgrade

Customers Customers

SP $275 $100

VCU 100 50

CMU 175 50

The 60%/40% sales mix implies that, in each bundle, 3 units are sold to new customers and 2
units are sold to upgrade customers.

Contribution margin of the bundle = 3  $175 + 2  $50 = $525 + $100 = $625

$15, 000, 000

Breakeven point in bundles = = 24,000 bundles
$625

Breakeven point in units is:

Sales to new customers: 24,000 bundles  3 units per

bundle 72,000 units

24,000 bundles  2 units per 48,000

Sales to upgrade customers: bundle units

Total number of units to breakeven (rounded) 120,000

units

Alternatively,

Let S = Number of units sold to upgrade customers

1.5S = Number of units sold to new customers

Revenues – Variable costs – Fixed costs = Operating income

 [$275 (1.5S) + $100S] – [$100 (1.5S) + $50S] – $15,000,000 = OI

$512.5S – $200S – $15,000,000 = OI

Breakeven point is 120,000 units when OI = $0 because

$312.5S = $15,000,000

S = 48,000 units sold to upgrade customers

1.5S = 72,000 units sold to new customers

BEP = 120,000 units

Check

Revenues ($275  72,000) + ($100  48,000) $24,600,000

Variable costs ($100  72,000) + ($50  48,000) 9,600,000

Contribution margin 15,000,000

Fixed costs  15,000,000

Operating income $ 0

2. When 220,000 units are sold, mix is:

Units sold to new customers (60%  220,000) 132,000

Units sold to upgrade customers (40%  220,000) 88,000

Revenues ($275  132,000) + ($100  88,000) $45,100,000

Variable costs ($100  132,000) + ($50  88,000) 17,600,000

Contribution margin 27,500,000

Fixed costs 15,000,000

Operating income $12,500,000

3a. At New 40%/Upgrade 60% mix, each bundle contains 2 units sold to new customers and 3
units sold to upgrade customers.

Contribution margin of the bundle = 2  $175 + 3  $50 = $350 + $150 = $500

$15, 000, 000

Breakeven point in bundles = = 30,000 bundles
$500

Breakeven point in units is:

Sales to new customers: 30,000 bundles × 2 unit per bundle 60,000 units

Sales to upgrade customers: 30,000 bundles × 3 unit per bundle 90,000 units

Total number of units to breakeven 150,000 units

Alternatively,

Let S = Number of units sold to new customers

then 1.5S = Number of units sold to upgrade customers

[$275S + $100 (1.5S)] – [$100S + $50 (1.5S)] – $15,000,000 = OI

425S – 175S = $15,000,000

250S = $15,000,000

S = 60,000 units sold to new customers

1.5S = 90,000 units sold to upgrade customers

BEP = 150,000 units

Check

Revenues ($275  60,000) + ($100  90,000) $25,500,000

Variable costs ($100  60,000) + ($50  90,000) 10,500,000

Contribution margin 15,000,000

Fixed costs 15,000,000

Operating income $ 0
3b. At New 80%/ Upgrade 20% mix, each bundle contains 4 units sold to new customers and 1
unit sold to upgrade customers.

Contribution margin of the bundle = 4  $175 + 1  $50 = $700 + $50 = $750

$15, 000, 000

Breakeven point in bundles = = 20,000 bundles
$750

Breakeven point in units is:

Sales to new customers: 20,000 bundles  4 units per bundle 80,000 units

Sales to upgrade customers: 20,000 bundles  1 unit per bundle 20,000 units

Total number of units to breakeven 100,000 units

Alternatively,

Let S = Number of units sold to upgrade customers

then 4S = Number of units sold to new customers

[$275 (4S) + $100S] – [$100 (4S) + $50S] – $15,000,000 = OI

1,200S – 450S = $15,000,000

750S = $15,000,000

S = 20,000 units sold to upgrade customers

4S = 80,000 units sold to new customers

100,000 units

Check

Revenues ($275  80,000) + ($100  20,000) $24,000,000

Variable costs ($100  80,000) + ($50  20,000) 9,000,000

Contribution margin 15,000,000

Fixed costs 15,000,000

 Operating income $ 0

3c. As Data increases its percentage of new customers, which have a higher contribution
margin per unit than upgrade customers, the number of units required to break even
decreases:

New Upgrade Breakeven

Customers Customers Point

Requirement 3(a) 40% 60% 150,000

Requirement 1 60 40 120,000

Requirement 3(b) 80 20 100,000

Chapter 4
ACCT-312: CHAPTER 4 EXERCISES
Actual costing, normal costing, acciunting for manufacturing overhead. Destin products uses a job-
costing system with two direct-costing categories. 1. Compute the actual and budgeted manufacturing
overhead rates for 2011. 2, compute the cost of job 626 using a, actual costing and normal costing. Why
is there no under or overallocatd overhead under actual costing.

4-17] Actual costing, normal costing, accounting for manufacturing overhead.

Budgeted manufacturing
Budgeted manufacturing overhead costs
1. overhead rate =
Budgeted direct manufacturing
labor costs

$2, 700, 000

= = 1.80 or 180%
$1,500, 000

Actual manufacturing
Actual manufacturing overhead costs
overhead rate =
Actual direct manufacturing
labor costs
 $2, 755, 000
= = 1.9 or 190%
$1, 450, 000

2. Costs of Job 626 under actual and normal costing follow:

Actual Normal

Costing Costing

Direct materials $ 40,000 $ 40,000

Direct manufacturing labor costs 30,000 30,000

Manufacturing overhead costs

$30,000  1.90; $30,000  1.80 57,000 54,000

Total manufacturing costs of Job 626 $127,000 $124,000

Total manufacturing overhead Actual manufacturing Budgeted

3. allocated under normal costing = labor costs  overhead rate

= $1,450,000  1.80

= $2,610,000

Underallocated manufacturing Actual manufacturing Manufacturing

overhead = overhead costs – overhead allocated

= $2,755,000  $2,610,000 = $145,000

There is no under- or overallocated overhead under actual costing because overhead is

allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs.
All actual overhead costs are allocated to products. Hence, there is no under- or overallocated
overhead.

Amesbury construction assembles residential houses. It uses a job- costing system with two direct
costing categories. 1. Compute the a; budgeted indirect cost rate and actual indirect cost rate why do
they differ. 2. What a are the job costs of the laguna model and the mission model using a, normal
costing and actul costing. 3. Why might amesbury construction prefer normal costing over actual
costing?

Job costing, normal and actual costing.

Budgeted indirect- Budgeted indirect costs (assembly support) $8,300,000

1. cost rate = =
Budgeted direct labor-hours 166,000 hours

= $50 per direct labor-hour

Actual indirect- Actual indirect costs (assembly support) $6,520,000

cost rate = =
Actual direct labor-hours 163,000 hours

= $40 per direct labor-hour

These rates differ because both the numerator and the denominator in the two calculations are
different—one based on budgeted numbers and the other based on actual numbers.

2a. Laguna Mission

Model Model

Normal costing

Direct costs

Direct materials $106,760 $127,550

Direct labor 36,950 41,320

143,710 168,870

Indirect costs

Assembly support ($50  960; $50  1,050) 48,000 52,500

Total costs $191,710 $221,370

2b. Actual costing

Direct costs

Direct materials $106,760 $127,550

Direct labor 36,950 41,320

143,710 168,870

Indirect costs

Assembly support ($40  960; $40  1,050) 38,400 42,000

Total costs $182,110 $210,870

3 Normal costing enables Amesbury to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use.
Once the 960 direct labor-hours are known for the Laguna Model (June 2011), Amesbury can
compute the $191,710 cost figure using normal costing. Amesbury can use this information to
manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In
contrast, Amesbury has to wait until the December 2011 year-end to compute the $182,110
cost of the Laguna Model using actual costing.

Although not required, the following overview diagram summarizes Amesbury

Construction’s job-costing system.
Lynn company uses normal job costing system at its minneapolis plant. Compute the total manufactuing
overhead costs allocated to a jon 494.

Exercise #4-20:
Consider the following selected cost datta for the pittsburgh forging company for 2011. 1. Compute the
budegted manufacturing overhead rate. 2. Prepare the journal entries to record the allocation of
manufacturing overhead. 3. Compute the amount of under or overallocation of manufacturing
overhead.

Accounting for manufacturing overhead.

$7,500, 000
1. Budgeted manufacturing overhead rate =
250,000 machine-hours

= $30 per machine-hour

2. Work-in-Process Control 7,350,000

Manufacturing Overhead Allocated 7,350,000

(245,000 machine-hours  $30 per machine-hour = $7,350,000)

3. $7,350,000– $7,300,000 = $50,000 overallocated,

an insignificant amount of actual manufacturing overhead
costs $50,000 ÷ $7,300,000 = 0.68%.

Manufacturing Overhead Allocated 7,350,000

Manufacturing Department Overhead Control 7,300,000

Cost of Goods Sold 50,000

Proration of overhead. The ride on wave company produces a line of non motorized boats. 1. Calculate
the manufacturing overhead allocation rate. 2. Compute the amount under or overallocated
manufacturing overhead. 3. Calculate the ending balances in work in process, finished goods, and cost of
goods sold if under overallocated manufacturing overhead is as follows. 4. Which method makes the
most sense? Justify your answer.

4.30 Proration of overhead.

1. Budgeted manufacturing Budgeted manufacturing overhead cost

=
overhead rate Budgeted direct manufacturing labor cost

$125, 000
  50% of direct manufacturing labor cost
$250,000

2. Overhead allocated = 50%  Actual direct manufacturing labor cost

 = 50%  $228,000 = $114,000

Underallocated Actual
Allocated plant
manufacturing = manufacturing –
overhead costs
overhead overhead costs

= $117,000 – $114,000 = $3,000

Underallocated manufacturing overhead = $3,000

3a. All underallocated manufacturing overhead is written off to cost of goods sold.

Both work in process (WIP) and finished goods inventory remain unchanged.

Proration of $3,000
Dec. 31, 2011 Dec. 31, 2011
Balance Underallocated Balance

(Before Proration) Manuf. Overhead (After Proration)

Account (1) (2) (3) = (1) + (2)

WIP $ 50,700 $ 0 $ 50,700

Finished Goods 245,050 0 245,050

Cost of Goods Sold 549,250 3,000 552,250

Total $845,000 $3,000 $848,000

3b. Underallocated manufacturing overhead prorated based on ending balances:

Dec. 31, 2011

Account Proration of $3,000 Account
Dec. 31, 2011 Balance
Account Balance Balance as a Underallocated
(After
(Before Proration) Percent of Total Manuf. Overhead Proration)

Account (1) (2) = (1) ÷ $845,000 (3) = (2)  $3,000 (4) = (1) + (3)

WIP $ 50,700 0.06 0.06  $3,000 = $ 180 $ 50,880

Finished Goods 245,050 0.29 0.29  $3,000 = 870 245,920

Cost of Goods
Sold 549,250 0.65 0.65  $3,000 = 1,950 551,200

Total $845,000 1.00 $3,000 $848,000

3c. Underallocated manufacturing overhead prorated based on 2011 overhead in ending
balances:

Allocated
Manuf.

Dec. 31, 2011 Overhead in Dec. 31, 2011

Account Allocated Manuf. Account
Proration of $3,000
Balance Dec. 31, 2011 Overhead in Balance
Balance Dec. 31, 2011 Underallocated
(Before (Before Balance as a (After
Proration) Proration) Percent of Total Manuf. Overhead Proration)

Account (1) (2) (3) = (2) ÷ $114,000 (4) = (3)  $3,000 (5) = (1) + (4)

WIP $ 50,700 $ 10,260a 0.09 0.09  $3,000 =$ 270 $ 50,970

Finished Goods 245,050 29,640b 0.26 0.26  $3,000 = 780 245,830

Cost of Goods Sold 549,250 74,100c 0.65 0.65  $3,000 = 1,950 551,200

Total $845,000 $114,000 1.00 $3,000 $848,000

a,b,c
Overhead allocated = Direct manuf. labor cost  50% = $20,520; $59,280; $148,200  50%

4. Writing off all of the underallocated manufacturing overhead to Cost of Goods Sold (CGS) is
usually warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory
and the underallocated manufacturing overhead is immaterial. Both these conditions apply in
this case. ROW should write off the $3,000 underallocated manufacturing overhead to Cost of
Goods Sold Account.