ESLSCA

UNIVERSITY
MBA PROGRAM

ACCOUNTING FOR MANAGERS

MANAGERIAL
ACCOUNTING [PART
TWO]
Dr. Maha Ramadan
 Content:

Lecture 1 Page 3

Lecture 2 Page 7

Lecture 3 Page 14

Lecture 4 Page 21

Lecture 5 Page 28

1
LECTURE ONE:
COST CLASSIFICATIONS

1. Dickison Corporation reported the following data for the month of December:

Direct Materials……………………...$71,000
Direct Labor cost……………………..38,000
Manufacturing Overhead…………….69,000
Selling expenses……………………...24,000
Administrative expenses……………..42,000

a. The conversion cost for December was:

A. $107,000 B. $142,000
C. $111,000 D. $178,000

b. The prime cost for December was:

A. $109,000 B. $111,000
C. $107,000 D. $66,000

2. A partial listing of costs incurred during December at Gagnier Corporation appears

below:

Factory supplies $8,000

Administrative wages and salaries 105,000
Direct materials 153,000
Sales staff salaries 68,000
Factory depreciation 49,000
Corporate headquarters building rent 34,000
Indirect Manufacturing labor 32,000
Marketing 103,000
Direct Labor 83,000

a. The total of the period [non manufacturing ]costs listed above for December is:
A. $89,00 B. 310,000 C. $325,000 D. $399,000
0
b. The total of the indirect manufacturing overhead costs listed above for December is:

A. $325,000 B. $635,000
C. $89,000 D. $40,000

c. The total of the product costs [manufacturing] listed above for December is:

2
A. $310,000 B. $89,000
C. $635,000 D. $325,000
3. Lettman Corporation has provided the following partial listing of costs incurred during
November:

Marketing Salaries $45,000

Property taxes factory 9,000
Administrative travel 98,000
Sales commission 48,000
Indirect labor 38,000
Direct material 165,000
Advertising 138,000
Depreciation of production equipment 39,000
Direct labor 87,000

Required
a. What is the total amount of product cost listed above? Show your work.

b. What is the total amount of period cost listed above? Show your work.

4. The following information summarizes the company's cost structure:

Variable cost per unit…………$1.30

Fixed costs per unit………….…..4.5
Total cost per unit………………5.80
Units produced and sold……….48,000

Required

Estimate the following costs at the 40,000 unit level of activity:

a. Variable cost per unit=

b. Total variable cost =
c. Total fixed cost. =

3
 d. Fixed cost per unit =
e. Total Cost/unit =
5. Answer the following questions based on the given data:

Sales price………………………….$160 per unit

Fixed costs:
Marketing and administrative…..$20,000 per period
Manufacturing overhead…………$15,000 per period

Variable Costs:
Marketing ……………...……………$5 per unit
Manufacturing overhead……………………….…………$30 per unit
Direct labor (manufacturing)……………..………………..$10 per unit
Direct materials (manufacturing)………..............................$40 per unit
Number of units produced and sold during the period………1000 units

Required:
a. How much is the total manufacturing cost COGS per unit?

b. How much is the total variable cost per unit?

c. How much is the contribution margin per unit?

d. How much is the gross margin (profit)per unit?

e. Prepare a contribution approach and a traditional approach income statement

4
6. Whitman Corporation, a merchandising company, reported sales of 7,400 units for May at a
selling price of $677 per unit. The cost of goods sold (all variable) was $441 per unit and the
variable selling expense was $54 per unit. The total fixed selling expense was $155,600. The
variable administrative expense was $24 per unit and the total fixed administrative expense was
$370,400.

Required:
a. Prepare a contribution format income statement for May.
b. Prepare a traditional format income statement for May.

7. Stewart Company has no beginning and ending inventories, and reports the following
information about its only product:

Direct materials used $29,000

Direct labor $17,000
Variable indirect production $13,000
Fixed indirect production $18,000
Variable selling and administrative expenses $22,000
Fixed selling and administrative expenses $11,000
Units produced and sold 10,000
Selling price per unit $25

Required:

A) Prepare an income statement using the contribution approach.

B) Prepare an income statement using the traditional approach.

8. Honey Corporation, a merchandising company, reported the following results for January:

Number of units produced 5,800

Selling price per unit $892
Units costs of goods sold $517
Variable selling expense per unit $31
Total fixed selling expense $152,600
Variable administrative expense per unit $48
Total fixed administrative expenses $390,200

Cost of goods sold is a variable cost in this company.

Required:
A) Prepare a traditional format income statement for January.
Sales – Manufacturing costs = Gross profit – Selling and operating cost = net income
B) Prepare a contribution format income statement for January.
Sales – Total variable costs = Contribution margin – total fixed costs= net income

5
LECTURE TWO:
BRAK EVEN ANALYSIS (CVP Analysis)

TASK ONE

The following information describes a product expected to be produced and sold by Garrison
Company:

Selling price $80 per unit

Variable costs $32 per unit
Total fixed costs $630,000

Required:
(a) Calculate the contribution margin ratio.

(b) Calculate the break-even point in dollar sales.

(c) What dollar amount of sales would be necessary to achieve a pretax income of
$120,000?

TASK TWO

Bing Company's contribution margin income statement is presented below.

Sales for the current period consisted of 7,500 units.

Bing Company
Contribution Margin Income Statement
Sales $225,000
Variable costs 135,000
Contribution margin 90,000
Fixed costs 48,000
Net income $42,000

Required:
Q1: Compute the company's break-even point in
(a) units, and (b) dollars.

Q2: Compute the margin of safety in

(b) dollars and (d) percent.

6
TASK THREE
Longiotti Corporation produces and sells a single product. Data concerning that product appear
below:
Selling price per unit ……$150
Variable expense per unit……36
Fixed expense per month…..$159,600

Required:
Determine the monthly break-even in total dollar sales.

TASK FOUR
Magnolia Company is considering the production and sale of a new product with the following
sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500;
and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.
(a) Calculate break-even in units.
(b) Calculate break-even in dollars (use four decimal places when calculating the
contribution margin ratio).
(c) Calculate number of units that would need to be sold to generate an after-tax profit of
$420,000 assuming a 30% tax rate.
(d) Calculate dollar sales that would be needed to generate the same profit as above.
(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales
level.
Be sure to label each calculation and show all calculations.

TASK FIVE
Iron Decor manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:

Required:
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.

7
TASK SIX
A product has a contribution margin per unit of $17 and sells at $25 per unit. If the break-even
point is 82,000 units, calculate
(a) the variable costs per unit and

(b) the total fixed costs.

TASK SEVEN:
Winston Company has variable costs of $5 per unit and a selling price of $10 per unit. Fixed
costs are $100,000. Planned unit sales for 2015 are 25,000 units. Actual unit sales for 2014 were
22,000 units. What is the margin of safety in units for 2015?

A) 2,000 units B) 3,000 units

C) 5,000 units D) 7,000 units

TASK EIGHT
If the selling price per unit $100
Variable costs per unit $80
Total fixed costs $80,000
If fixed costs increased by 10% and management wanted to maintain the original break-even
point, then the selling price per unit would have to be increased to ________.
A) $101.00 B) $102.40
C) $102.00 D) $103.00

TASK NINE
Stanger Inc. produces and sells two products. Data concerning those products for the most recent
month appear below:
Product N16S Product X07D
Sales $14,000 $27,000
Variable expenses $6,720 $12,550

Fixed costs for the entire company are $17570

Required
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product N16S with no change in total sales, what will happen to
the break-even point for the company? Explain.

8
TASK TEN
Penury Company offers two products. At present, the following represents the usual results of a
:month's operations

:Required
a. Find the break-even point in dollars

b. Find the margin of safety in dollars

c. The company is considering decreasing product K's unit sales to 80,000 and increasing
product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable
expense per unit, and total fixed expenses. Would you advise adopting this plan?

d. Refer to (c) above. Under the new plan, find the break-even point in dollars.

e. Under the new plan in (c) above, find the margin of safety in dollars.

9
TASK ELEVEN.
The following monthly data in contribution format are available for the MN Company and its
only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or ending
inventories.

Required:

a. Without resorting to calculations, what is the total contribution margin at the break-even
point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product
SD. This change would reduce variable expenses by $18 per unit. The company's sales
manager predicts that this would reduce the overall quality of the product and thus would
result in a decline in sales to a level of 250 units per month. Should this change be made?

c. Assume that MN Company is currently selling 300 units of Product SD per month.
Management wants to increase sales and feels this can be done by cutting the selling price by
$22 per unit and increasing the advertising budget by $20,000 per month. Management
believes that these actions will increase unit sales by 50 percent. Should these changes be
made?

d. Assume that MN Company is currently selling 300 units of Product SD. Management wants
to automate a portion of the production process for Product SD. The new equipment would
reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new
robotic equipment of $10,000. Management believes that the new equipment will increase
the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should
these changes be made?

10
TASK TWELVE.

Morse Company reports total contribution margin of $48,000 and pretax net income of $12,000
for the current month. The degree of operating leverage is:
A) 4.0 B) 0.25
C) 1.25 D) 2.5
E) 250%

TASK THIRTEEN.
Fielder Productions reports the following information:

Total contribution margin………………… $32,000

Total fixed costs……………………… $28,000
Income 4000

Required:
(a) Calculate Fielder's degree of operating leverage (DOL).

(b) If sales increase by 6%, what is the expected percentage increase in pretax
income?

TASK FOURTEEN.

A company is looking into two alternative methods of producing its product. The following
information about the two alternatives is available. If the company's expected sales volume is
35,000 units, which alternative should be selected?

Required:
Prepare forecasted contribution margin income statements and compute the degree of operating
leverage to assess the alternatives.

Alternative #1 Alternative #2
Variable costs per unit……… $8 $12
Fixed costs…………………… $240,000 $140,000
Selling price per unit………… $20 $20

11
 TASK FIFTEEN.

Preston Company is analyzing two alternative methods of producing its product. The production
manager indicates that variable costs can be reduced 40% by installing a machine that automates
production, but fixed costs would increase.
Alternative 1 shows costs before installing the machine;
Alternative 2 shows costs after the machine is installed.

Alternative 1 Alternative 2
Variable costs per unit………………… $20 12
Fixed costs…………………………… $200,000 $274,400
Selling price per unit………………… $40 $40
Income tax rate………………………… 25% 25%

Required:
(a) Compute the break-even point in units and dollars for both alternatives.

Alternative 1 Alternative 2

(b) Prepare a forecasted income statement for both alternatives assuming that 30,000
units will be sold. The statements should report sales, total variable costs,
contribution margin, fixed costs, income before taxes, income taxes, and net
income. Below the income statement, compute the degree of operating leverage.
Which alternative would you recommend and why?

12
LECTURE THREE: COSTING
TASK ONE
Selected information from the budget of the Singh Corp. at the beginning of the year follows:
Estimated factory overhead $132,000
Estimated direct labor hours 55,000 hours
Estimated machine hours……... 41,250 hours
Estimated direct labor cost $825,000
Actual factory overhead
incurred during the year $144,000

Calculate the predetermined overhead rate if the company uses the following as a basis:
(a) Direct labor hours.

(b) Direct labor cost.

(c) Machine hours.

TASK TWO
Green Cabinets is a custom cabinet builder. They recently completed a set of kitchen cabinets
(Job Number 1478), as summarized below:

Job Number:1478
Date Started: 4/07/20x8
Date Completed: 4/22/20x8
Description: Cherry kitchen cabinets
Applied
Direct Materials Direct Labor Manufacturing Overhead
Req. No Amount Ticket Hours Amount Hours Rate Amount
385 $ 300 128 16 $ 288
391 225 130 23 426
395 150 133 12 264
401 215
Total $ 890 Total 51 $ 978
Cost Summary
Direct Material Cost $ 890
Direct Labor Cost 978
Applied Manufacturing Overhead `
Total Cost
Green Cabinets applies overhead to jobs at a rate of $12 per direct labor hour.
a. How much overhead would be applied to Job #1478?

13
b. What is the total cost of Job #1478?
TASK THREE:
Aztec Industries produces bread which goes through two operations, mixing and baking, before
it is ready to be packaged. Next year's expected costs and activities are shown below.

Mixing Baking
Direct labor hours 400,000 DLH 80,000 DLH
Machine hours 800,000 MH 800,000 MH
Overhead costs $600,000 $400,000

a. Compute Aztec's departmental overhead rate for the mixing department based on direct labor
hours.
b. Compute Aztec's departmental overhead rate for the mixing department based on machine
hours.
c. Compute Aztec's departmental overhead rate for the baking department based on direct labor
hours.
d. Compute Aztec's departmental overhead rate for the baking department based on machine
hours.

TASK FOUR
Carlson Company has two departments. Factory overhead costs are applied based on direct labor
cost in Department A and machine hours in Department B.

The following information is available:

Budgeted Costs Dept. A Dept. B
Direct labor cost $150,000 $165,000
Machine hours 51,000 20,000
Factory overhead cost $225,000 $180,000

Actual data for Job #10 are as follows:

Actual Costs Dept. A Dept. B
Direct materials requisitioned $10,000 $16,000
Direct labor cost $11,000 $14,000
Machine hours5,000 3,000

Required:
A. Compute the budgeted factory overhead rate for Department A.

B. Compute the budgeted factory overhead rate for Department B.

C. What is the total overhead cost for Job #10?

14
 D. If Job #10 consists of 50 units of product, what is the unit cost of this job?
TASK FIVE:
Taylor Corp. uses a job order costing system and worked only on Job 101 during the current
period. Job 101 was sold for $460,000. The following information pertains to costs incurred for
Job 101.
Direct materials $90,000
Indirect materials $30,000
Direct labor $130,000
Indirect labor $75,000
Depreciation of machinery $10,000
Factory supplies $8,000
Overhead rate 90% of direct labor

After adjusting for the amount of over- or underapplied overhead, determine the amount of gross
profit earned during the year.

TASK SIX
The predetermined overhead rate for Foster, Inc., is based on estimated direct labor costs of
$400,000 and estimated factory overhead of $500,000. Actual costs incurred were:

Direct materials $240,000

Direct labor 410,000
Indirect materials 55,000
Indirect labor 125,000
Sales commissions 55,000
Factory depreciation 170,000
Property taxes, factory 15,000
Factory utilities 35,000
Advertising 62,500
Factory equipment rental 110,000

(a) Calculate the predetermined overhead rate and calculate the overhead applied
during the year.

(b) Determine the amount of over- or underapplied overhead and prepare the journal
entry to eliminate the over- or underapplied overhead assuming that it is not
material in amount.

15
TASK SEVEN
The Lynn Company uses a normal job-costing system at its Minneapolis plant. The plant has a
machining department and an assembly department. Its job-costing system has two direct-cost
categories (direct materials and direct manufacturing labor) and two manufacturing overhead
cost pools (the machining department overhead, allocated to jobs based on actual machine-hours,
and the assembly department overhead, allocated to jobs based on actual direct manufacturing
labor costs). The 2021 budget for the plant is as follows:

Machining Department Assembly Department

Manufacturing Overhead 1,800,000 3,600,000
Direct Manufacturing labor costs 1,400,000 2,000,000
Direct manufacturing labor hours 100,000 200,000
Machine Hours 50,000 200,000
1-Compute the budgeted manufacturing overhead rate for each department.

During February, the job-cost record for Job 494 contained the following:
Machining Department Assembly Department
Direct Materials Used 45,000 70,000
Direct Manufacturing labor costs 14,000 15,000
Direct manufacturing labor hours 1,000 1,500
Machine Hours 2,000 1,000
2-Compute the total manufacturing costs for Job 494.

3. At the end of 2021, the actual manufacturing overhead costs were $2,100,000 in machining
and $3,700,000in assembly. Assume that 55,000 actual machine-hours were used in machining
and that actual direct manufacturing labor costs in assembly were $2,200,000. Compute the over-
or under-allocated manufacturing overhead for each department.

TASK EIGHT

16
A company identified the following partial list of activities, costs, and activity drivers expected
for the next year:

Activity Expected Costs Cost Driver

Extrusion costs $83,600 Number batches made
Handling costs $8,800 Number of orders filled
Packaging costs $40,500 Number of units made

Product A Product B
Production volume 750,000 units 600,000 units
Batches made 200 batches 750 batches
Orders filled 75 200

a. Calculate activity rates for each of the three activities using activity-based costing (ABC).

b. How much overhead in total will be assigned to the Product A line using activity-based
costing?

TASK NINE
A company has two products: A and B. It uses activity-based costing and has prepared the
following analysis showing budgeted costs and activities. Use this information to compute
(a) the company's overhead rates for each of the three activities and
(b) the amount of overhead allocated to Product A.

TASK TEN
Fischer Company identified the following activities, costs, and activity drivers:

17
Activity Expected Costs Expected Activity
Handling parts $425,000 25,000 parts in stock
Inspecting product $390,000 940 batches
Processing purchase orders $220,000 440 orders
Designing packaging $230,000 5 models
a. Compute a plantwide overhead rate assuming the company assigns overhead based on 70,000
budgeted direct labor hours (Round to two decimals).

b. Compute separate rates for each of the four activities using the activity-based costing.

TASK ELEVEN
Bark Mode, Incorporated produces and distributes two types of security systems, Standard and
Deluxe. Budgeted cost and activity for each of its three activity cost pools are shown below.
The company plans to produce and sell 120,000 standard units and 80,000 deluxe units.

a. Compute the approximate overhead cost per unit of standard under activity-based costing.

b. Compute the approximate overhead cost per unit of deluxe under activity-based costing.

TASK TWELVE

18
Automotive Products (AP) designs and produces automotive parts. In 2021, actual variable
manufacturing overhead is $308,600. AP’s simple costing system allocates variable
manufacturing overhead to its three customers based on machine-hours and prices its contracts
based on full costs. One of its customers has regularly complained of being charged
noncompetitive prices, so AP’s controller Devon Smith realizes that it is time to examine the
consumption of overhead resources more closely. He knows that there are three main
departments that consume overhead resources: design, production, and engineering. Interviews
with the department personnel and examination of time records yield the following detailed
information.

Cost driver Variable Usage of cost drivers by

Manufacturing customer contract
OH United Holden Leland
motors motors vehicle
Design CAD design $39,000 110 200 80 390
hours
Engineering Engineering 29,600 70 60 240 370
hours
Production Machine 240,000 120 2,800 1,080 4000
hours
Total $ 308,600

Required:
1. Compute the manufacturing overhead allocated to each customer in 2021 using the
simple costing system that uses machine-hours as the allocation base.

2. Compute the manufacturing overhead allocated to each customer in 2021 using

department-based manufacturing overhead rates.

3. Comment on your answers in requirements 1 and 2. Which customer do you think was
complaining about being overcharged in the simple system?

19
TASK THIRTEEN
The job costing system at Sheri’s Custom Framing has five indirect cost pools (purchasing,
material handling, machine maintenance, product inspection, and packaging). The company is in
the process of bidding on two jobs: Job 215, an order of 15 intricate personalized frames, and Job
325, an order of 6 standard personalized frames. The controller wants you to compare overhead
allocated under the current simple job-costing system and a newly designed activity-based job-
costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of
activity driver are as follows.
Budgeted Overhead Activity driver Budgeted quantity of
activity driver
Purchasing $35,000 Purchase orders 2,000
produced
Materials handling 43,750 Material moves 5,000
Machine 118,650 Machine hours 10,500
Maintenance
Product inspection 9,450 Inspections 1,200
Packaging 19950 Units produced 3,800
226,800
Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs
because it uses more types of materials that need to be purchased, moved, and inspected relative
to Job 325.
Job 215 Job 325
Number of purchase orders 25 8
Number of material moves 10 4
Machine-hours 40 60
Number of inspections 9 3
Units produced 15 6

Required:
1. Compute the total overhead allocated to each job under a simple costing system, where
overhead is allocated based on machine-hours.

2. Compute the total overhead allocated to each job under an activity-based costing system
using the appropriate activity drivers.

3. Explain why Sheri’s Custom Framing might favor the ABC job-costing system over the
simple job-costing system, especially in its bidding process.

20
LECTURE 4
DECISION MAKING ANALYSIS
TASK ONE A: Keep or Drop a Product Line
1-The Cook Corporation has two divisions--East and West. The divisions have the following
revenues and expenses:

East West
Sales $ 500,000 $ 550,000
Variable costs 200,000 275,000
Traceable fixed costs 150,000 180,000
Allocated common corporate costs 135,000 170,000
Net operating income (loss) $ 15,000 $ (75,000)

The management of Cook is considering the elimination of the West Division. If the West
Division were eliminated, its traceable fixed costs could be avoided. Total common corporate
costs would be unaffected by this decision. Given these data, the elimination of the West
Division would result in an overall company net operating income (loss) of:
A) $15,000 B) ($155,000) C) ($75,000) D) ($60,000)

2-Vanik Corporation currently has two divisions which had the following operating results for
last year:
Rubber
Cork Division Division
Sales $ 600,000 $ 350,000
Variable costs 250,000 220,000
Contribution margin 350,000 130,000
Traceable fixed costs 160,000 110,000
Segment margin 190,000 20,000
Allocated common corporate fixed costs 80,000 45,000
Net operating income (loss) $ 110,000 $ (25,000)

Because the Rubber Division sustained a loss, the president of Vanik is considering the
elimination of this division. All of the division's traceable fixed costs could be avoided if the
division was dropped. None of the allocated common corporate fixed costs could be avoided. If
the Rubber Division was dropped at the beginning of last year, the financial advantage
(disadvantage) to the company for the year would have been:
A) ($20,000) B) $20,000 C) $25,000 D) ($25,000)

21
3-Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line
income data:

The following additional information is available:

 The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
 The company's total depreciation would not be affected by dropping C.
 Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
 All supervisors' salaries are avoidable.
 If Product C is discontinued, the maintenance department will be able to reduce its monthly
expenses
 Elimination of Product C will make it possible to cut two persons from the administrative
staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.

4- The most recent monthly income statement for Benner Stores is given below:
Total Store A Store B
Sales $1,000,000 $400,000 $600,000
Variable expenses 580,000 160,000 420,000
Contribution margin 420,000 240,000 180,000
Traceable fixed expenses 300,000 100,000 200,000
Store segment margin 120,000 140,000 (20,000)
Common fixed expenses 50,000 20,000 30,000
Net operating income $70,000 $120,000 $(50,000)

Due to its poor showing, consideration is being given to closing Store B. Studies show that if
Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies
also show that closing Store B would result in a 10 percent decrease in sales in Store A. The
company allocates common fixed expenses to the stores on the basis of sales dollars.
Required:

22
Determine the monthly financial advantage (disadvantage) of closing Store B.

(Make or Buy Decisions)

1-Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one
of its products. Data concerning the unit production costs of the B345 gasket follow:

Direct materials $0.15

Direct labor 0.10
Variable manufacturing overhead 0.13
Fixed manufacturing overhead 0.24
Total manufacturing cost per unit $0.62

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If
Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed
manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:

a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to
production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each,
should Kirsten Corporation accept the offer? Fully support your answer with appropriate
calculations.

b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the
B345 gaskets to expand production of another product that would yield an additional
contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation
should be willing to pay the outside supplier for B345 gaskets?

2-Epsilon Co. can produce a unit of product for the following costs:

Direct material $ 8
Direct labor 24
Overhead 40
Total product costs per unit $ 72

An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon
buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose
to:
A) Buy since the relevant cost to make it is $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.

23
3- Frederick Co. is thinking about having one of its products manufactured by an outside
supplier.

Currently, the cost of manufacturing 5,000 units is:

Direct material $ 62,000

Direct labor 47,000
Variable factory overhead 38,000
Factory overhead 52,000

If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:
A) Make the product because current factory overhead is less than $130,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less
than $130,000.
C) Make the product because factory overhead is a sunk cost.
D) Buy the product because total fixed and variable manufacturing costs are greater than
$130,000.
E) Buy the product because the total incremental costs of manufacturing are greater than
$130,000.

24
(Special Order Decisions)
Anglen Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly
production is 14,400 trophies. The company normally charges $103 per trophy. Cost data for the
current level of production are shown below:

Variable costs:
Direct materials $460,800
Direct labor $316,800
Selling and administrative $15,840
Fixed costs:
Manufacturing $404,640
Selling and administrative $74,880

The company has just received a special one-time order for 900 trophies at $48 each. For this
particular order, no variable selling and administrative costs would be incurred. This order would
also have no effect on fixed costs. Assume that direct labor is a variable cost.
Required:
Should the company accept this special order? Why?

(2) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per
unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of
its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable
cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at
a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a
result of the additional production. Should the company accept the special order?
A) No, because additional production would exceed capacity.
B) No, because incremental costs exceed incremental revenue.
C) Yes, because incremental revenue exceeds incremental costs.
D) Yes, because incremental costs exceed incremental revenues.
E) No, because the incremental revenue is too low.

25
(3) Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per
unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of
its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable
cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at
a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a
result of the additional production. Should the company accept the special order?
A) No, because net income would decrease by $1,500.
B) No, because net income would decrease by $2,000.
C) Yes, because net income would increase by $7,500.
D) Yes, because net income would increase by $2,000.
E) No, because net income would decrease by $5,500.

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LECTURE FIVE:BUDGETING
TASK ONE
Groundworks Company budgeted the following credit sales during the current year: September,
$90,000; October, $123,000; November, $105,000; December, $111,000. Experience has shown
that cash from credit sales is received as follows: 10% in the month of sale, 50% in the first
month after sale, 35% in the second month after sale, and 5% is uncollectible. How much cash
should Groundworks Company expect to collect in November from all current and past credit
sales?

Answer:

TASK TWO:
Addams, Inc., is preparing its master budget for the second quarter. The following sales and
production data have been forecasted:

April May June July August

Unit sales …… 400 500 520 480 540

Finished goods inventory on March 31: 120 units

Raw materials inventory on March 31: 450 pounds

Desired ending inventory each month:

Finished goods: 30% of next month's sales
Raw materials: 25% of next month's production needs
Number of pounds of raw material required per finished unit: 4 lbs.

How many pounds of raw materials should be purchased in April?

Answer:

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 April May
Budgeted sales units ……………………………………
Desired finished goods ending inventory (30% * 500; 30% *
520)
Total ………………………………………………………
Less: Beginning finished goods inventory ………….
Budgeted units to be produced………………….…….
Raw material units per finished unit ………………..
Materials needed for production ………………………
Desired raw material ending inventory (25% * 2,024) …….
Total needs ……………………………………………………….
Less: Beginning raw materials inventory ……………………..
Purchases …………………………………………………………

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TASK THREE
Gertrude Products expects the following sales of its single product:
Units
July 6,000
August 6,500
September 7,200
October 7,800
November 8,800

Gertrude desires an ending finished goods inventory to be equal to 10% of the next month's sales needs.
July 1 inv 800
Each unit requires 5 pounds of Chemical A and 14 pounds of Chemical B. July 1 materials inventory
includes 8,600 pounds of Chemical A and 76,000 pounds of Chemical B. Gertrude desires to maintain a
Chemical A inventory equal to 20% of next month's production needs and a Chemical B inventory equal
to 100% of next month's production needs.

Required:
a. Prepare a production budget for Gertrude for as many months as is possible.

b. Prepare a direct materials purchases budget for both Chemical A and Chemical B for the months
of July through September.

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TASK FOUR
Snap, Inc., provides the following data for the next four months:

April May June

Budgeted production units 442 570 544
Ending Raw Materials Inventory ……. 663 lbs.
Ending Finished Goods Inventory …... 174 Units

Desired Ending Inventory:

Raw Materials = 30% of next month's production needs
Pounds of raw material required for each finished Unit = 5 lbs.

Required:
Calculate the amount of purchases of raw materials in pounds for April and May.

Answer:
April May June

Production budgeted

Pounds of raw material per unit

Production needs in pounds of raw material

Desired ending inventory of raw materials

Total

Less beginning inventory of raw materials

Purchase of raw materials in pounds

TASK FIVE
A sporting goods manufacturer budgets production of 45,000 pairs of ski boots in the first
quarter and 30,000 pairs in the second quarter of the upcoming year. Each pair of boots require 2
kg of a key raw material. The company aims to end each quarter with ending raw materials
inventory equal to 20% of the following quarter's material needs. Beginning inventory for this
material is 18,000 kg and the cost per kg is $8. What is the budgeted materials purchases cost for
the first quarter?

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TASK SIX
The production budget for Greski Company revealed the following production volume for the
months of July—September. Each unit produced requires 2.5 hours of direct labor. The direct
labor rate is predicted to be $16 per hour in all months. Prepare a direct labor budget for Greski
Company for July—September.

July Aug Sept

Units to be produced 620 680 540

Answer:

Greski Company Direct Labor Budget for the Three Months Ended September 30
July August September
Budgeted production (units) ………………
Labor requirements per unit (hours) ………
Total labor hours needed ………………….
Labor rate per hour ………………………..
Labor dollars ………………………………

TASK SEVEN
Kindschuh Corporation is working on its direct labor budget for the next two months. Each unit of output
requires 0.07 direct labor-hours. The direct labor rate is $8.50 per direct labor-hour. The production budget
calls for producing 4,800 units in June and 5,300 units in July.

Required:
Construct the direct labor budget for the next two months, assuming that the direct labor work force is fully
adjusted to the total direct labor-hours needed each month.

TASK EIGHT
Honeysuckle Inc. produces canvas bags. The production budget for the next four months is: July 5,000
units, August 7,000, September 7,500, October 8,000. Each bag requires 2.6 hours of unskilled labor
(paid $8 per hour) and 4.4 hours of skilled labor (paid $15 per hour).

Required:
Prepare a labor budget for the three months July through September. Provide the labor requirements
according to skill level in hours and in labor cost as well as in total. Provide the budget monthly as well as
a total for the quarter.

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TASK NINE
Capati Corporation is working on its direct labor budget for the next two months. Each unit of output requires
0.41 direct labor-hours. The direct labor rate is $8.50 per direct labor-hour. The production budget calls for
producing 2,300 units in August and 2,200 units in September. The company guarantees its direct labor
workers a 40-hour paid work week. With the number of workers currently employed, that means that the
company is committed to paying its direct labor work force for at least 960 hours in total each month even if
there is not enough work to keep them busy.

Required:
Construct the direct labor budget for the next two months.

TASK TEN
Sugar Co. has forecast sales for the next four months as follows: July 4,000 units, August 6,000 units,
September 7,500 units, and October 8,000 units. Sugar's policy is to have an ending inventory of 40% of
the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Manufacturing
overhead is budgeted to be $17,000 plus $5 per unit produced.

Required:
a. Prepare a production budget for Sugar for as many months as is possible.
b. Prepare a manufacturing overhead budget for the three months July — September. Be sure to include
a total for the quarter as well

TASK ELEVEN
Mccoo Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead
rate is $1.30 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $98,900 per
month, which includes depreciation of $19,780. All other fixed manufacturing overhead costs represent current
cash flows. The September direct labor budget indicates that 8,600 direct labor-hours will be required in that
month.

Required:
a. Determine the cash disbursement for manufacturing overhead for September.
b. Determine the predetermined overhead rate for September.

TASK TWELVE
The manufacturing overhead budget of Lewison Corporation is based on budgeted direct labor-hours. The June
direct labor budget indicates that 5,800 direct labor-hours will be required in that month. The variable
overhead rate is $7.70 per direct labor-hour. The company's budgeted fixed manufacturing overhead is
$111,360 per month, which includes depreciation of $17,400. All other fixed manufacturing overhead costs
represent current cash flows.

Required:
a. Determine the cash disbursement for manufacturing overhead for June. Show your work!
b. Determine the predetermined overhead rate for June. Show your work!

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TASK THIRTEEN
Bear Corp. sells its product for $120. Forecasted sales are 1,200 units in October, 1,500 in November, and
1,600 in December. Variable costs are based on sales, and consist of commissions (7% of sales),
advertising (3%) and shipping (5%). Fixed costs per month are $4,000 sales salaries, $3,300 office
salaries, $2,000 depreciation, $1,800 office rent, $750 insurance and $900 utilities.

Required:
Prepare Bear Corp's selling and administrative expense budget for the period October through December.
Present monthly totals as well as a 3-month total.

TASK FOURTEEN
Lahay Inc. bases its selling and administrative expense budget on the number of units sold. The variable
selling and administrative expense is $4.30 per unit. The budgeted fixed selling and administrative
expense is $30,240 per month, which includes depreciation of $3,510. The remainder of the fixed selling
and administrative expense represents current cash flows. The sales budget shows 2,700 units are planned
to be sold in April.

Required:
Prepare the selling and administrative expense budget for April.

TASK FIFTEENTEEN
the selling and administrative expense budget of Fenley Corporation is based on the number of units sold,
which are budgeted to be 2,500 units in January. The variable selling and administrative expense is $4.40
per unit. The budgeted fixed selling and administrative expense is $35,750 per month, which includes
depreciation of $4,000. The remainder of the fixed selling and administrative expense represents current
cash flows.
Required:
Prepare the selling and administrative expense budget for January.

TASK SIXTEEN
Enciso Corporation is preparing its cash budget for November. The budgeted beginning cash balance is
$31,000. Budgeted cash receipts total $135,000 and budgeted cash disbursements total $141,000. The desired
ending cash balance is $50,000. The company can borrow up to $100,000 at any time from a local bank, with
interest not due until the following month.
Required:
Prepare the company's cash budget for November in good form.

TASK SEVENTEEN:
Webster Corporation is preparing its cash budget for April. The March 31 cash balance is $36,400. Cash
receipts are expected to be $641,000 and cash payments for purchases are expected to be $608,500. Other
cash expenses expected are $27,000 selling and $33,500 general and administrative. The company desires
a minimum cash balance at the end of each month of $30,000. If necessary, the company borrows enough
cash to meet the minimum using a short-term note.
Required:
Calculate the amount Webster must borrow during April

33
Multiple choice Questions:
1-Aloan Co. provides the following sales forecast for the next three months:

January February March

Sales units 3,000 4,200 5,000

The company wants to end each month with ending finished goods inventory equal to 10% of the
next month's sales. Finished goods inventory on December 31 is 300 units. The budgeted
production units for February are:
A) 5,000 units.
B) 4,200 units.
C) 4,700 units.
D) 4,120 units.
E) 4,280 units.

2) Flack Corporation, a merchandiser, provides the following information for its December
budgeting process:

The November 30 inventory was 1,800 units.

Budgeted sales for December are 4,000 units.
Desired December 31 inventory is 2,840 units.

Budgeted purchases are:

A) 5,040 units.
B) 1,240 units.
C) 6,840 units.
D) 4,000 units.
E) 5,800 units.

3- A department store has budgeted sales of 12,000 men's suits in September. Management
wants to have 6,000 suits in inventory at the end of the month to prepare for the winter season.
Beginning inventory for September is expected to be 4,000 suits. What is the dollar amount of
the purchase of suits if each suit has a cost of $75.
A) $750,000.
B) $900,000.
C) $1,050,000.
D) $1,200,000.
E) $1,350,000.

4) A sporting equipment store expects to purchase $8,000 of ski boots in October. The store had
$2,000 of ski boots in merchandise inventory at the beginning of October, and expects to have
$3,000 of ski boots in merchandise inventory at the end of October to cover part of anticipated
November sales. What is the budgeted cost of goods sold for October?

34
A) $5,000.
B) $7,000.
C) $8,000.
D) $9,000.
E) $10,000.

5) Masterson Company's budgeted production calls for 56,000 liters in April and 52,000 liters in
May of a key raw material that costs $1.85 per liter. Each month's ending raw materials
inventory should equal 30% of the following month's budgeted materials. The April 1 inventory
for this material is 16,800 liters. What is the budgeted materials need in liters for April?
A) 71,600 liters.
B) 39,200 liters.
C) 57,600 liters.
D) 56,000 liters.
E) 54,800 liters.

6) A sporting goods manufacturer budgets production of 45,000 pairs of ski boots in the first
quarter and 30,000 pairs in the second quarter of the upcoming year. Each pair of boots require 2
kg of a key raw material. The company aims to end each quarter with ending raw materials
inventory equal to 20% of the following quarter's material needs. Beginning inventory for this
material is 18,000 kg and the cost per kg is $8. What is the budgeted materials purchases cost for
the first quarter?
A) $720,000.
B) $672,000.
C) $576,000.
D) $729,600.
E) $864,000.

7) Alliance Company's budgets production of 24,000 units in January and 28,000 units in the
February. Each finished unit requires 4 pounds of raw material K that costs $2.50 per pound.
Each month's ending raw materials inventory should equal 40% of the following month's
budgeted materials. The January 1 inventory for this material is 38,400 pounds. What is the
budgeted materials need in pounds for January?
A) 102,400 pounds.
B) 96,000 pounds.
C) 57,600 pounds.
D) 140,800 pounds.
E) 83,200 pounds.

35
8) The sales budget for Modesto Corp. shows that 20,000 units of Product A and 22,000 units of
Product B are going to be sold for prices of $10 and $12, respectively. The desired ending
inventory of Product A is 20% higher than its beginning inventory of 2,000 units. The beginning
inventory of Product B is 2,500 units. The desired ending inventory of B is 3,000 units. Total
budgeted sales of both products for the year would be:
A) $42,000.
B) $200,000.
C) $264,000.
D) $464,000.
E) $500,000.

9) Western Company is preparing a cash budget for June. The company has $12,000 cash at the
beginning of June and anticipates $30,000 in cash receipts and $34,500 in cash disbursements
during June. Western Company has an agreement with its bank to maintain a minimum cash
balance of $10,000. As of May 31, the company owes $15,000 to the bank. To maintain the
$10,000 required balance, during June the company must:
A) Borrow $4,500.
B) Borrow $2,500.
C) Borrow $10,000.
D) Repay $7,500.
E) Repay $2,500.

10) Frankie's Chocolate Co. reports the following information from its sales budget:

Expected Sales: July $ 90,000

August 104,000
September 120,000

Cash sales are normally 25% of total sales and all credit sales are expected to be collected in the
month following the date of sale. The total amount of cash expected to be received from
customers in September is:
A) $30,000.
B) $78,000.
C) $108,000.
D) $120,000.
E) $130,500.

36
11) Junior Snacks reports the following information from its sales budget:
October $ 143,000
Expected Sales:
November 151,000
December 187,000
All sales are on credit and are expected to be collected 40% in the month of sale and 60% in the
month following sale. The total amount of cash expected to be received from customers in
November is:
A) $146,200.
B) $85,800.
C) $151,000.
D) $236,800.
E) $60,400.

12) Justin Company's budget includes the following credit sales for the current year: September,
$25,000; October, $36,000; November, $30,000; December, $32,000. Experience has shown that
payment for the credit sales is received as follows: 15% in the month of sale, 60% in the first
month after sale, 20% in the second month after sale, and 5% is uncollectible. How much cash
can Justin Company expect to collect in November as a result of current and past credit sales?
A) $19,700.
B) $28,500.
C) $30,000.
D) $31,100.
E) $33,900.

13) Funcycle Manufacturing's budget includes the following credit sales for the current year:
September, $145,000; October, $136,000; November, $120,000; December, $157,000.
Experience has shown that payment for the credit sales is received as follows: 15% in the month
of sale, 50% in the first month after sale, and 35% in the second month after sale. What are the
cash collections of credit sales in the month of December?
A) $23,550.
B) $107,600.
C) $83,550.
D) $157,000.
E) $131,150.

14)Walter Enterprises expects its September sales to be 20% higher than its August sales of
$150,000. Purchases were $100,000 in August and are expected to be $120,000 in September.
All sales are on credit and are collected as follows: 30% in the month of the sale and 70% in the
following month. Merchandise purchases are paid as follows: 25% in the month of purchase and
75% in the following month. The beginning cash balance on September 1 is $7,500. The ending
cash balance on September 30 would be:
A) $31,500. B) $67,500. C) $54,000.
D) $61,500. E) $136,500.

37
15) The Gardner Company expects sales for October of $248,000. Experience suggests that 45%
of sales are for cash and 55% are on credit. The company collects 50% of its credit sales in the
month of sale and 50% in the month following sale. Budgeted Accounts Receivable on
September 30 is $67,000. What is the amount of Accounted Receivables on the October 31
budgeted balance sheet?
A) $111,600.
B) $124,000.
C) $67,000.
D) $68,200.
E) $136,400.

16) Trago Company manufactures a single product and has a JIT policy that ending inventory
must equal 5% of the next month's sales. It estimates that May's ending inventory will consist of
14,000 units. June and July sales are estimated to be 280,000 and 290,000 units, respectively.
Trago assigns variable overhead at a rate of $1.80 per unit of production. Fixed overhead equals
$400,000 per month. Compute the number of units to be produced and use this amount to
compute the total budgeted overhead that would appear on the factory overhead budget for the
month of June.
A) $920,200. B) $904,900.
C) $930,100. D) $922,000.
E) $878,800.

17) Zhang Industries budgets production of 300 units in June and 310 units in July. Each unit
requires 1.5 hours of direct labor. The direct labor rate is $14 per hour. The indirect labor rate is
$21.00 per hour. Compute the budgeted direct labor cost for July.
A) $6,300.
B) $6,510.
C) $9,450.
D) $9,765.
E) $16,275.

18) Zhang Industries is preparing a cash budget for June. The company has $25,000 cash at the
beginning of June and anticipates $95,000 in cash receipts and $111,290 in cash disbursements
during June. The company has no loans outstanding on June 1. Compute the amount the
company must borrow, if any, to maintain a $20,000 cash balance.
A) $28,710.
B) $12,290.
C) $16,290.
D) $11,290.
E) $6,290.

38
19) Webster Corporation's budgeted sales for February are $325,000. Webster pays sales
representatives a commission of 6% of sales dollars. The company pays a sales manager a
monthly salary of $4,400 and expects advertising expense of $2,000 per month. Compute the
total selling expenses to be reported on the selling expense budget for the month of February.
A) $19,500. B) $6,400. C) $23,900.
D) $25,900. E) $21,500.

20) Webster Corporation is preparing a master budget for the first quarter of the year. The
company budgets production of 2,680 units in January, 2,600 units in February and 2,740 units
in March. Each unit requires 0.6 hours of direct labor. The direct labor rate is $12 per hour.
Compute the budgeted direct labor cost for the first quarter budget.
A) $56,160. B) $57,744. C) $96,240.
D) $93,600. E) $48,120.

39