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EXAM REVIEW
ACCOUNTING 102 - UNIT II - CHAPTERS 4, 5, & 6
STUDY SUGGESTIONS
Review your class notes, homework exercises and problems. Review Summary, Review Problem and Glossary at the end of each chapter. Use your Study Guide, especially Multiple Choice and True & False questions Review the resource materials and practice quizzes and exams available on the Textbook Website : http://highered.mcgraw-hill.com/sites/0073048836/information_center_view0/ Additional review materials are available online at sites such as: http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html
Chapter 4 – Systems Design: Process Costing Understand the differences and similarities between job order and process costing. Understand how product costs flow through the inventory accounts and into cost of goods sold. Understand that each production department has a unique Production Report and separate work-in-process inventory account. Know the journal entries required in a Process Cost system. Understand the concept of "Equivalent Units" and how to calculate equivalent units Know how to prepare a Production Report consisting of: Quantity Schedule Equivalent Units Cost per Equivalent Unit Cost Reconciliation
Chapter 5 - Cost Behavior: Analysis And Use Understand the differences between fixed costs and variable costs Explain the relationship between variable cost and the activity base. Distinguish between true variable costs and step variable costs. Distinguish between committed and discretionary fixed costs. Explain how the relevant range affects the behavior of variable and fixed costs. Explain mixed costs and how to analyze them using high-low method and scatter-graph methods. Prepare an income statement using the contribution approach.
Chapter 6 - Cost-Volume-Profit Relationships CVP analysis is based on the interactions among the following five elements: Price or revenue of products Volume or level of activity Per units variable costs Total fixed costs. Mix of products sold (CVP analysis requires an assumption about sales mix)
Contribution Margin: Understand the difference between gross margin and contribution margin Understand the relationship among: Revenue, variable cost and contribution margin per unit Total revenue, variable cost, contribution margin and fixed costs Level of activity / number of units sold Contribution Margin is the remaining amount of sales dollars available to cover fixed expenses and profit. Contribution Margin in Dollars = Sales Revenue - Variable Expenses. Contribution Margin per unit = Selling Price per unit – Variable Expense per unit Contribution Margin Ratio = Contribution Margin / Sales
Break-Even Point: At the Break-even Point: Profit or operating income equals 0. Total revenue equals total costs. Total contribution margin equals fixed expenses. The break-even point is measured in sales dollars and/or units sold. It may be calculated using either the Equation Method or the Contribution Margin Method:
Equation Method : In Units Sold: sales $/unit X units sold = variable expenses $/unit X units sold + fixed expenses + profit of 0 In Sales Dollars: sales % = variable expenses % + fixed expenses + profit of 0
Contribution Margin Method: In Units Sold: (Fixed Expenses + Profit of 0) Contribution Margin per unit In Sales Dollars: Fixed expenses + Profit of 0) Contribution Margin ratio
Problem 2 - Multiple Choice Questions
- Lap Company uses the weighted-average method in its process costing system. The beginning inventory in a particular department conisisted of 80,000 units, 100% complete with respect to materials and 25% complete with respect to conversion costs. The total dollar value of this inventory was $226,000. During the month, 150,000 units were transferred out of the department. The costs per equivalent unit of production for the month were $2.00 for materials and $3. for conversion costs. The value of the units completed and transferred out of the department was: a. $681, b. $765, c. $821, d. $825,
Questions 2-4 refer to the following:
Yoder Company uses the weighted-average method in its process costing system. The following data pertain to operations in the first processing department for a recent month:
Work in Process, beginning Units in process: 40, Stage of completion with respect to materials 70% Stage of completion with respect to conversion 60% Costs in the beginning inventory: Material cost $8, Conversion cost $4,
Units started into production during the month 750, Units completed and transferred out during the month?
Costs added to production during the month: Materials cost $223, Conversion cost $149,
Work in process, ending Units in process 30, Stage of completion with respect to materials 40% Stage of completion with respect to conversion 30%
- How many units were completed and transferred to the next department during the month? a. 750,000 units b. 790,000 units c. 760,000 units d. 740,000 units
- What was the cost per equivalent unit of production for materials during the month? a. $0. b. $0. c. $0. d. $0.
- How much cost, in total, was assigned to the ending work in process inventory? a. $2, b. $4, c. $15, d. $5,
Problem 3 – High-Low Method and Contribution income Statement
The Belfour Company is a manufacturer of a single product Belfour's income statements for the last two years are given below:
This Year Last Year Units sold 300,000 240,
Sales revenue $1,500,000 $1,200, Less: Cost of goods sold 800,000 740, Gross margin 700,000 460, Less: Operating expenses 450,000 420, Net Income 250,000 40,
The company's cost of goods sold and operating expenses are mixed costs.
Required: (a) Using the high-low method, separate the cost of goods sold and operating expenses into their variable and fixed elements. Show the formula used. (b) Prepare a contribution-format income statement for this year. (c) Calculate the anticipated net income if units sold is 280,000.
Questions 4-7 refer to the following: University Store, Inc.’s first quarter income statement is presented below:
University Store, Inc. Income Statement For the Quarter Ended March 31, 2003
Sales $800, Cost of Goods Sold 560, Gross Margin 240, Less: Operating Expenses: Selling Expenses $100, Administrative Expenses 110,000 210, Net Income $ 30,
On average, a book sells for $40.00. Variable selling expenses are $3.00 per book; the remaining selling expenses are fixed. The variable administrative expenses are 5% of sales; the remainder of the administrative expenses are fixed.
- The contribution margin for the University Store for the first quarter is: a. $660, b. $700, c. $180, d. $140,
- The net income computed using the contribution approach for the first quarter is: a. $ 30, b. $180, c. $140, d. $ 0
- The cost formula for operating expenses with “X” equal to the number of books sold is: a. Y = $105,000 + $3X b. Y = $105,000 + $5X c. Y = $110,000 + $5X d. Y = $110,000 + $33X
- If 25,000 books are sold during the second quarter, the company’s expected contribution margin would be: a. $875, b. $300, c. $175, d. $ 65,
Problem 5 - CVP Relationships
The Berman Company manufactures and sells a single product. The company's sales and expenses for last month were: Total Per Unit Percentage Sales $500,000 $25 100% Less: Variable expenses 200,000 10 40% Contribution margin 300,000 15 60% Less: Fixed expenses 270, Net income $ 30,
Required:
- Calculate the monthly break-even point in units sold and in sales dollars. a. using the equation method b. using the contribution margin method c. verify your answer by preparing a contribution income statement
- Without any computations, what is the contribution margin at the break-even point?
- How many units would have to be sold each month to earn a minimum target net income of $60,000?
Verify your answer by preparing a contribution income statement at the target level of sales.
- Refer to the original data above. Compute the company's margin of safety in both dollars and percentage.
- Refer to the original data above. a. What is the company's Contribution Margin Ratio? b. If monthly sales increase by $25,000 and there is no change in fixed expenses, by how much would you expect net income to increase?
- Refer to the original data above. If the company were able to reduce its variable expenses by $1 per unit, a. what would be the new monthly break-even point in units and sales dollars? b. verify your answer by preparing a contribution income statement.
- Compute the company's degree of operating leverage. If sales increase by 10% how much should net income increase?
4. Given the following data:
Questions 5-7 refer to the following:
- Selling price per unit $2. - Variable production cost per unit $0. - Fixed production cost $3, - Sales commission per unit $0. - Fixed selling expenses $1, - a. $6, The breakeven point in dollars is: - b. $4, - c. $2, - d. $4,
- Sales $2,000, Pricher Corporation’s income statement for last year appears below:
- Direct materials $500, Cost of goods sold:
- Direct labor (variable) 150,
- Variable manufacturing overhead 50,
- Fixed manufacturing overhead 600,000 1,300,
- Gross Profit 700,
- Variable 100, Selling and administrative expenses
- Operating Income 300, - a. $1,500, 5. The breakeven point last year was: - b. $2,571, - c. $1,250, - d. $ 900, - a. 0. 6. The degree of operating leverage last year was: - b. 2. - c. 4. - d. 3.
- If fixed selling and administrative expenses increase by $60,000 and sales remain at the $2,000,000 level, what is the margin of safety in sales dollars: a. $300, b. $200, c. $500, d. $400,
Problem 2
- D 150,000 units transferred out x 5.50 whole unit cost ($2.00 DM + $3.50 DL) $825,
- C Beg. WIP ........ 40, +Units started into prod.750, Units to account for 790,
Less: units in ending WIP30, Units finished & transferred760,
- A Equivalent Units DM CV Transferred out 760,000 760, Ending WIP: DM – 30,000 * 40% 12, CV – 30,000 * 30% 9, Equivalent Units (a) 772,000 769,
Total & Unit Cost DM CV Beg. WIP 8,600 4, Costs Added 223,000 149, Total Costs (b) 231,600 153, Cost per equiv. Unit (b / a) $.30 $.
- D Cost of Ending WIP DM: 12,000 * .3 = 3, CV: 9,000 * .2 = 1, Total 5,
Problem 3
(a) Cost of goods sold: Cost Activity High level of activity $800,000 300, Low level of activity 740,000 240, Change $ 60,000 60,
Variable rate: Change in cost / change in activity $60,000 / 60,000 units = $1.00 per unit
Fixed Cost element = Total cost - variable cost element $800,000 - (300,000 units x $1) = $500,
Equation: Y = 500,000 + 1X
Operating expenses Cost Activity High level of activity $450,000 300, Low level of activity 420,000 240, Change $ 30,000 60,
Variable rate: $30,000 / 60,000 units = $0.50 per unit
Fixed cost: $450,000 - (300,000 units x $0.50) = $300,
Equation: Y = 300,000 + .5X
(b) The company's income statement for this year using the contribution format.
Sales Revenue $1,500, Less: Variable expenses Cost of goods sold 300, Operating expenses 150,000 450, Contribution margin 1,050, Less: Fixed expenses: Cost of goods sold 500, Operating expenses 300,000 800, Net income $ 250,
- D Sale 800, -Var. Exp.: COGS 560, Var. Selling 60, Var. Adm. 40,000 660, CM 140,
- A
- D Variable Costs: COGS $28.00 ($800,000 sales / $40 unit sales price) Var. Selling 3. Var. Adm. 2.00 (5% of sales of $800,000)/20,000 units Var. Cost per unit $33. Fixed Costs: Fixed Selling $40,000 (100,000 – ($3 * 20,000) Fixed Adm. 70,000 [110,000 – (5% * Sales of 800,00)] Total Fixed 110, Cost Formula: Y = 33X + 110,
- C Sales (25,000 * $40) 1,000, Var Exp. (25,000 * 33) 825, CM 175,
Problem 5
- Monthly break-even point in units and sales dollars: (a) using equation method: X =.40X + $270, .6X = $270, X= $270,000 /. X = $450, $450,000 / 25 = 18,000 units Alternatively: $25X = $10X + $270, $15X = $270, X = $270,000 / $ X = 18,000 units (b) using contribution margin method: $270,000 / $15 = 18,000 units 18,000 units X $25 = $450, Alternatively: $270,000 / .6 = $450,
(c) proof: Sales $450, Less: Variable expenses 180, Contribution margin 270, Less: Fixed expenses 270, Net income $ 0
- The contribution margin is $270,000, equal to the fixed expenses
- Target level of sales: 270,000 + 60,000 = 330, 330,000 / 15 = 22,000 units 22,000 units X $25 = $550,
Proof: Sales $550, Less: Variable expenses 220, Contribution margin 330, Less: Fixed expenses 270, Net income $ 60,
- Margin of safety: $500,000 - $450,000 = $50, $50,000 / $500,000 = .10 or 10%
- (a) Contribution margin ratio is 60% (300,000 / 500,000 = .60 or 60%) (b) Net income should increase by $15,000 (60% of $25,000)
- New contribution margin is $16 per unit New break-even point is $270,000 / $16 = 16,875 units 16,875 units X 25 = $421, Proof: Sales $ 421, Less: Variable expenses 151, Contribution margin 270, Less: Fixed expenses 270, Net income $ 0
- Degree of operating leverage is 10; ($300,000 / $30,000=10) Net income should increase by 100%; (10 X 10% = 100%) Proof: Compare original data with income statement in solution 3 above. Sales increased 10% and net income increased 100%, from $30,000 to $60,
Break-even point: Fixed Cost = 900, CM % = .6 (1,200,000/2,000,000) Break-even sales = 900,000/.6 = $1,500,
- C Contribution Margin 1,200, Net Income 300,000 = 4
- D New Break-even Point: Fixed Cost = 960, CM% =. Break-even sales = 960,000/.6 = $1,600, Margin of Safety = Sales – BE Sales = $2,000,000 – $1,600, = $400,
