Course Title : Cost Accounting.

Answer all questions

1. Carlos Cavalas, the manager of Echo Products' Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 69,190 units during the year, but by September 30 only the following activity had been reported:

Units

Inventory, January 1 0

Production 72,200

Sales 62,900

Inventory, September 30 9,300

The division can rent warehouse space to store up to 29,900 units. The minimum inventory level that the division should carry is 1,000 units. Mr. Cavalas is aware that production must be at least 5,580 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 45,200 units per quarter.

Demand has been soft, and the sales forecast for the last quarter is only 20,600 units. Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost.

Required:

1a. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?

1b. Will the number of units scheduled for production affect the division's reported income or loss for the year?

2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income. If Mr. Cavalas wants to maximize his division's operating income for the year, how many units should be scheduled for production during the last quarter?

Question 2

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis):

Year 1 Year 2 Year3

Sales $1,100,000 $850,000 $1,100,000

Cost of goods sold 850,000 600,000 900,000

Gross margin 250,000 250,000 200,000

Selling and administrative expenses 220,000 190,000 220,000

Net operating income (loss) $30,000 $60,000 $(20,000)

In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax's sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:

Year 1 Year 2 Year 3

Production in units 50,000 60,000 40,000

Sales in units 50,000 40,000 50,000

Additional information about the company follows:

1. The company's plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $5.00 per unit, and fixed manufacturing overhead expenses total $600,000 per year.
2. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced.
3. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year.
4. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.)

Starfax's management can't understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1. Prepare a variable costing income statement for each year.

2. Refer to the absorption costing income statements above.

a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.

b. Reconcile the variable costing and absorption costing net operating income figures for each year.

5b. If Lean Production had been used during Year 2 and Year 3, what would the company's net operating income (or loss) have been in each year under absorption costing?

Questions 3

During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:

Year 1 Year 2

Sales (@ $63 per unit) $945,000 $1,575,000

Cost of goods sold (@ $35 per unit) 525,000 875,000

Gross margin 420,000 700,000

Selling and administrative expenses* 291,000 321,000

Net operating income $129,000 $379,000

* $3 per unit variable; $246,000 fixed each year.

The company's $35 unit product cost is computed as follows:

Direct materials $7

Direct labor 12

Variable manufacturing overhead 1

Fixed manufacturing overhead ($300,000 20,000 units) 15

Absorption costing unit product cost $35

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations are:

Year 1 Year 2

Units produced 20,000 20,000

Units sold 15,000 25,000

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Question 5

Millard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the West, Central, and East regions. Each of these regions is about the same size and each has its own manager and sales staff.

The company has been experiencing losses for many months. In an effort to improve performance, management has requested that the monthly income statement be segmented by sales region. The company's first effort at preparing a segmented income statement for May is given below.

Sales Region

West Central East

Sales $311,000 $796,000 $705,000

Regional expenses (traceable):

Cost of goods sold 93,000 236,000 317,000

Advertising 102,000 237,000 241,000

Salaries 59,000 55,000 112,000

Utilities 8,900 16,300 13,900

Depreciation 23,000 33,000 26,000

Shipping expense 12,000 28,000 36,000

Total regional expenses 297,900 605,300 745,900

Regional income (loss) before corporate expenses13,100 190,700 (40,900)

Corporate expenses:

Advertising (general) 17,000 40,000 38,000

General administrative expense 21,000 21,000 21,000

Total corporate expenses 38,000 61,000 59,000

Net operating income (loss) $(24,900) $129,700 $(99,900)

The cost of goods sold and shipping expense are both variable. All other costs are fixed.

Required:

3.Prepare a new contribution format segmented income statement for May.(Round percentage answers to 1 decimal place.)

Question 5

Vulcan Company's contribution format income statement for June is as follows:

Vulcan Company

Income Statement

For the Month Ended June 30

Sales $900,000

Variable expenses 408,000

Contribution margin 492,000

Fixed expenses 465,000

Net operating income $27,000

Management is disappointed with the company's performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:

a. The company is divided into two sales territoriesNorthern and Southern. The Northern Territory recorded $400,000 in sales and $228,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $168,000 and $130,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.

b. The company is the exclusive distributor for two productsPaks and Tibs. Sales of Paks and Tibs totaled $140,000 and $260,000, respectively, in the Northern territory during June. Variable expenses are 31% of the selling price for Paks and 71% for Tibs. Cost records show that $64,400 of the Northern Territory's fixed expenses are traceable to Paks and $52,000 to Tibs, with the remainder common to the two products.

Required:

1-a. Prepare contribution format segmented income statements for the total company broken down between sales territories.

1-b. Prepare contribution format segmented income statements for the Northern Territory broken down by product line.