AFAR 1 - Handouts - ABC and Variable Costing with answers PDF

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New Rage Cosmetics has used a traditional cost accounting system to apply quality control costsuniformly to all products at a rate of 14% of direct labor cost. Monthly direct labor cost forSatin Sheen makeup is $27,500. In an attempt to distribute quality control costs moreequitably, New Rage is con...

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New Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more equitably, New Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen. Quantity for Activity Cost Driver Cost Rates Satin Sheen Incoming material inspection Type of material $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is a. $88.64 per order. b. $525.50 lower than the cost using the traditional system. c. $8,500.50 d. $525.50 higher than the cost using the traditional system. Questions 14 through 16 are based on the following information. A company has identified the following overhead costs and cost drivers for the coming year. Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level Machine setup No. of setups $ 20,000 200 Inspection No. of inspections $130,000 6,500 Material handling No. of material moves $ 80,000 8,000 Engineering Engineering hours $ 50,000 1,000 $280,000 The following information was collected on three jobs that were completed during the year: Job 101 Job 102 Job 103 Direct materials $5,000 $12,000 $8,000 Direct labor $2,000 $ 2,000 $4,000 Units completed 100 50 200 Number of setups 1 2 4 Number of inspections 20 10 30 Number of material moves 30 10 50 Engineering hours 10 50 10 Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000. 14. If the company uses activity-based costing, how much overhead cost should be allocable to Job 101? a. $1,300 b. $2,000 c. $5,000 d. $5,600 15. If the company uses activity-based costing, compute the cost of each unit of Job 102. a. $340 b. $392 c. $440 d. $520 16. The company prices its products at 140% of cost. If the company uses activity-based costing, the price of each unit of Job 103 would be a. $98 b. $100 c. $116 d. $140

Questions 17 thru 22 are based on the following information Special Products recently installed an activity-based relational data base. Using the information contained in the activity relational table, the following pool rates were computed: $200 per purchase order $12 per machine hour, process A $15 per machine hour, process B $40 per engineering hour Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to its production. The plant has two manufacturing processes, process A and process B. Other processes include engineering, product handling and procurement. The product relational table for Special is as follows: Activity Usage Activity Driver # Name Product A Product B 1 Units 200,000 25,000 2 Purchase orders 250 125 3 Machine hours 80,000 10,000 4 Engineering hours 1,250 1,500 17. How much overhead cost will be assigned to product A using the number of purchase orders? a. $50,000 b. $25,000 c. $40,000,000 d. $66,750 18. How much overhead cost will be assigned to product B using engineering hours? a. $50,000 b. $60,000 c. $1,000,000 d. $400,500 19. How much overhead cost will be assigned to product A using process A? a. $1,200,000 b. $2,400,000 c. $960,000 d. $120,000 20. How much overhead cost will be assigned to product B using process B? a. $1,200,000 b. $960,000 c. $120,000 d. $150,000

21. What is the unit cost of Product A? a. $4.71 b. $3.76

c. $252.00

d. $5.30

22. What is the unit cost of Product B? a. $9.40 b. $6.00

c. $252.00

d. $6.41

Questions 23 thru 26 are based on the following information. Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows: Estimated Expected Activity Activity Cost Pool Overhead Costs Product A Product B Total Activity 1 $14,487 500 600 1,100 Activity 2 $64,800 2,500 500 3,000 General Factory $12,736 240 100 340 Total $92,023 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.) 23. The predetermined overhead rate under the traditional costing system is closest to: a. $37.46. b. $21.60. c. $13.17. d. $270.66. 24. The overhead cost per unit of Product B under the traditional costing system is closest to: a. $54.13. b. $7.49. c. $4.32. d. $2.63. 25. .The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to: a. $28.97. b. $13.17. c. $83.66. d. $24.15. 26.The overhead cost per unit of Product A under the activity-based costing system is closest to: a. $86.97. b. $70.79. c. $81.20. d. $11.24. Enigma Corporation The following information was extracted from the first year absorption-based accounting records of Enigma Corporation Total fixed costs incurred Total variable costs incurred Total period costs incurred Total variable period costs incurred

$100,000 50,000 70,000 30,000

Units produced Units sold Unit sales price

20,000 12,000 $12

97.Refer to Enigma Corporation. What is Cost of Goods Sold for Enigma Corporation's first year? a. $80,000 b. $90,000 c. $48,000 d. can't be determined from the information given ANS: C Total variable manufacturing costs = $50,000 - 30,000 = $20,000 Total fixed period costs incurred = $70,000 - 30,000 = $40,000 Total fixed manufacturing costs = $100,000 - 40,000 = $60,000 Total manufacturing costs = $60,000 + $20,000 = $80,000 Percent of goods sold: 12,000/20,000 = 60% $80,000 * 60% = $48,000 DIF: Difficult OBJ: 3-7 98.Refer to Enigma Corporation. If Enigma Corporation had used variable costing in its first year of operations, how much income (loss) before income taxes would it have reported? a. ($6,000) b. $54,000 c. $26,000 d. $2,000 ANS: D Sales Less: Variable Costs Manufacturing $20,000 * 60% Period Costs $30,000 Contribution Margin Fixed Costs Variable Costing Net Income

DIF: Difficult

$144,000 12,000 30.000 $102,000 100,000 2,000 ======

OBJ: 3-7

99.Refer to Enigma Corporation. Based on variable costing, if Enigma had sold 12,001 units instead of 12,000, its income before income taxes would have been a. $9.50 higher. b. $11.00 higher. c. $8.50 higher. d. $8.33 higher. ANS: C Sales Price per Unit: Variable Costs per Unit ($50,000 / 20,000) Contribution Margin

$12.00 2.50 $ 8.50 ======

DIF:

Moderate

OBJ:

3-7

King Corporation King Corporation produces a single product. The following cost structure applied to its first year of operations: Variable costs: SG&A Production Fixed costs (total cost incurred for the year): SG&A Production

$2 per unit $4 per unit $14,000 $20,000

100. Refer to King Corporation. Assume for this question only that during the current year King Corporation manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory. How much larger or smaller would King Corporation's income be if it uses absorption rather than variable costing? a. The absorption costing income would be $6,000 larger. b. The absorption costing income would be $6,000 smaller. c. The absorption costing income would be $4,800 larger. d. The absorption costing income would be $4,000 smaller. ANS: C Add back fixed manufacturing portion of units unsold (1,200/5,000) * $20,000 = $4,800. DIF: Moderate

OBJ: 3-7

Refer to King Corporation. Assume for this question only that King Corporation manufactured and sold 5,000 units in the current year. At this level of activity it had an income of $30,000 using variable costing. What was the sales price per unit? a. $16.00 b. $18.80 c. $12.80 d. $14.80 ANS: B Sales--5,000 units * $18.80/unit Variable Costs: Manufacturing S G &A Contribution Margin Fixed Costs Manufacturing S G &A Net Income

$94,000 20,000 10,000 $64,000 14,000 20,000 $30,000 =====

DIF: Moderate

OBJ: 3-7

Refer to King Corporation. Assume for this question only that King Corporation produced 5,000 units and sold 4,500 units in the current year. If King uses absorption costing, it would deduct period costs of a. $24,000. b. $34,000. c. $27,000. d. $23,000. ANS: D Variable SG&A Costs (4,500 units * $2/unit) Fixed SG&A Costs Total period costs to be deducted

DIF: Moderate

$ 9,000 14,000 $23,000 ======

OBJ: 3-7

Refer to King Corporation. Assume for this question only that King Corporation manufactured 5,000 units and sold 4,000 in the current year. If King employs a costing system based on variable costs, the company would end the current year with a finished goods inventory of a. $4,000. b. $8,000. c. $6,000. d. $5,000. ANS: A 1,000 units * $4.00 variable cost per unit = $4,000 DIF: Moderate

OBJ: 3-7

Companies R, S, and T Three new companies (R, S, and T) began operations on January 1 of the current year. Consider the following operating costs that were incurred by these companies during the complete calendar year:

Production in units Sales price per unit Fixed production costs Variable production costs Variable SG&A Fixed SG&A

Company R 10,000 $10 $10,000 $30,000 $10,000 $30,000

Company S 10,000 $10 $20,000 $20,000 $20,000 $20,000

Company T 10,000 $10 $30,000 $10,000 $30,000 $10,000

104.Refer to Companies R, S, and T. Based on sales of 7,000 units, which company will report the greater income before income taxes if absorption costing is used? a. Company R b. Company S c. Company T d. All of the companies will report the same income. ANS: D

Under absorption costing, the net income for all three companies is the same. DIF: Moderate OBJ: 3-7 105. Refer to Companies R, S, and T. Based on sales of 7,000 units, which company will report the greater income before income taxes if variable costing is used? a. Company R b. Company S c. Company T d. All of the companies will report the same income. ANS: A Since Company R has the largest variable manufacturing costs, income will increase by the amount that was held in finished goods inventory. Bennett Corporation Bennett Corporation produces a single product that sells for $7.00 per unit. Standard capacity is 100,000 units per year; 100,000 units were produced and 80,000 units were sold during the year. Manufacturing costs and selling and administrative expenses are presented below. There were no variances from the standard variable costs. Any under- or overapplied overhead is written off directly at year-end as an adjustment to cost of goods sold.

Direct material Direct labor Manufacturing overhead Selling & Administration expense

Fixed costs $0 0 $150,000 80,000

Variable costs $1.50 per unit produced 1.00 per unit produced 0.50 per unit produced 0.50 per unit sold

Bennett Corporation had no inventory at the beginning of the year. Refer to Bennett Corporation. In presenting inventory on the balance sheet at December 31, the unit cost under absorption costing is a. $2.50. b. $3.00. c. $3.50. d. $4.50. ANS: D DM + DL + VOH + FOH = Absorption Cost per Unit $1.50 + $1.00 + $0.50 + $(150,000/100,000) = $4.50 / Unit DIF: Moderate OBJ: 3-7 Refer to Bennett Corporation. What is the net income under variable costing? a. $50,000 b. $80,000 c. $90,000 d. $120,000 ANS: A

Sales Variable Costs: Materials Labor Overhead Selling and Administrative Contribution Margin Fixed Costs Overhead Selling and Administrative Net Income

$560,000 $120,000 80,000 40,000 40,000 $280,000 150,000 80,000 $ 50,000 =======

DIF: Moderate OBJ: 3-7 110. Refer to Bennett Corporation. What is the net income under absorption costing? a. $50,000 b. $80,000 c. $90,000 d. $120,000 ANS: B Sales Cost of Goods Sold: Materials Labor Overhead (Variable and Fixed) Gross Profit Fixed Costs: Selling and Administrative Net Income

DIF: Moderate

OBJ: 3-7

$560,000 $120,000 80,000 160,000 $200,000 $120,000 $ 80,000 =======...