Question 1

Mastery Problem: Variable Costing for Management Analysis

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Absorption vs. Variable

Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing.

Select whether the following characteristics are most often associated with absorption costing or variable costing.

Required under generally accepted accounting principles (GAAP)	Absorption CostingVariable Costing
Often used for internal use in decision making	Absorption CostingVariable Costing
Cost of goods manufactured includes only variable manufacturing costs	Absorption CostingVariable Costing
Used in reports prepared for external users	Absorption CostingVariable Costing
Fixed factory overhead costs are not part of cost of goods manufactured	Absorption CostingVariable Costing
Both fixed and variable factory costs are included in cost of goods sold and inventory	Absorption CostingVariable Costing

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Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31
Sales		$1,200,000
Cost of goods sold:
Cost of goods manufactured	$800,000
Ending inventory	(160,000)
Total cost of goods sold		(640,000)
Gross profit		$560,000
Selling and administrative expenses		(289,000)
Operating income		$271,000

Variable Statement

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31
Sales		$1,200,000
Variable cost of goods sold:
Variable cost of goods manufactured	$560,000
Ending inventory	(112,000)
Total variable cost of goods sold		(448,000)
Manufacturing margin		$752,000
Variable selling and administrative expenses		(224,000)
Contribution margin		$528,000
Fixed costs:
Fixed manufacturing costs	$240,000
Fixed selling and administrative expenses	65,000
Total fixed costs		(305,000)
Operating income		$223,000

Method Comparison

Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $75, and the number of units in ending inventory is 4,000. There was no beginning inventory.

Item	Amount
Number of units sold	fill in the blank 9cdfc2faf015fd7_1
Variable sales and administrative costperunit	$fill in the blank 9cdfc2faf015fd7_2
Number of units manufactured	fill in the blank 9cdfc2faf015fd7_3
Variable cost of goods manufacturedperunit	$fill in the blank 9cdfc2faf015fd7_4
Fixedmanufacturingcostperunit	$fill in the blank 9cdfc2faf015fd7_5

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Manufacturing Decisions

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Operating Income
Original Production Level-Absorption	Original Production Level-Variable	Additional 10,000 Units-Absorption	Additional 10,000 Units-Variable
$fill in the blank f0f65400d060007_1	$fill in the blank f0f65400d060007_2	$fill in the blank f0f65400d060007_3	$fill in the blank f0f65400d060007_4

2. What is the change in operating income from producing 10,000 additional units under absorption costing?

$fill in the blank f0f65400d060007_5

3. What is the change in operating income from producing 10,000 additional units under variable costing?

$fill in the blank f0f65400d060007_6

4. What would be your recommendation to the production manager?

a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs.

b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits.

c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced.

d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold.

abcd

Question 8

Mastery Problem: Cost-Volume-Profit Analysis

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Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

Units Produced	Total Lumber Cost	Total Utilities Cost	Total Machine Depreciation Cost
14,000shelves	$154,000	$18,100	$130,000
28,000shelves	308,000	34,200	130,000
56,000shelves	616,000	66,400	130,000
70,000shelves	770,000	82,500	130,000

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

Lumber	Variable CostFixed CostMixed CostNone of these
Utilities	Variable CostFixed CostMixed CostNone of these
Depreciation	Variable CostFixed CostMixed CostNone of these

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

Cost	Fixed Portion of Cost	Variable Portion of Cost (per Unit)
Lumber	$fill in the blank c5b8d0fb5fbe05d_4	$fill in the blank c5b8d0fb5fbe05d_5
Utilities	fill in the blank c5b8d0fb5fbe05d_6	fill in the blank c5b8d0fb5fbe05d_7
Depreciation	fill in the blank c5b8d0fb5fbe05d_8	fill in the blank c5b8d0fb5fbe05d_9

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High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

	Units Produced	Total Cost
January	4,360	units	$65,600
February	300		6,250
March	1,000		15,000
April	6,800		103,750
May	1,750		32,500
June	3,015		48,000

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

Total Fixed Cost	Variable Cost per Unit
$fill in the blank d9085501df9f075_1	$fill in the blank d9085501df9f075_2

2. With Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

Number of Units Produced	Total Cost
3,500	$fill in the blank d9085501df9f075_3
4,360	fill in the blank d9085501df9f075_4
6,800	fill in the blank d9085501df9f075_5

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

abcd

Question Content Area

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 79,800 units during the year.

	Cover-to-Cover Company	Biblio Files Company
Contribution margin ratio (percent)	fill in the blank f3e0e9fd2068060_1%	fill in the blank f3e0e9fd2068060_2%
Unit contribution margin	$fill in the blank f3e0e9fd2068060_3	$fill in the blank f3e0e9fd2068060_4
Break-even sales (units)	fill in the blank f3e0e9fd2068060_5	fill in the blank f3e0e9fd2068060_6
Break-even sales (dollars)	$fill in the blank f3e0e9fd2068060_7	$fill in the blank f3e0e9fd2068060_8

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Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$399,000
Variable costs:
Manufacturing expense	$239,400
Selling expense	19,950
Administrative expense	59,850	(319,200)
Contribution margin		$79,800
Fixed costs:
Manufacturing expense	$5,000
Selling expense	4,000
Administrative expense	10,950	(19,950)
Operating income		$59,850

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$399,000
Variable costs:
Manufacturing expense	$159,600
Selling expense	15,960
Administrative expense	63,840	(239,400)
Contribution margin		$159,600
Fixed costs:
Manufacturing expense	$81,750
Selling expense	8,000
Administrative expense	10,000	(99,750)
Operating income		$59,850

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called "Combined," the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $332,640. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	fill in the blank 7f17a8f66f9a032_1%	fill in the blank 7f17a8f66f9a032_2	$fill in the blank 7f17a8f66f9a032_3
Deluxe	fill in the blank 7f17a8f66f9a032_4%	fill in the blank 7f17a8f66f9a032_5	$fill in the blank 7f17a8f66f9a032_6

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Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? $fill in the blank 02bbd9fd201cfdc_1

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? $fill in the blank 02bbd9fd201cfdc_2

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company's contribution margin ratio is lower, meaning that it's more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

abcd

Question 7

Mastery Problem: Differential Analysis and Product Pricing

WoolCorp

WoolCorp buys sheep's wool from farmers. The company began operations in January of this year, and is making decisions on product offerings, pricing, and vendors. The company is also examining its method of assigning overhead to products. Just been hired as a production manager at WoolCorp.

Currently WoolCorp makes three products: (1) raw, clean wool to be used as stuffing or insulation; (2) wool yarn for use in the textile industry, and (3) extra-thick yarn for use in rugs.

Upper management would like recommendations regarding a production decision regarding their current and proposed product lines.

Question Content Area

Continue/Discontinue

For the past year, WoolCorp has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. Decide to prepare differential analysis of the income related to all three products. To begin analysis, review the following condensed income statement. Then scroll down to complete the differential analysis.

WoolCorp Condensed Income Statement For the Year Ended December 31, 20Y8
	Raw Wool	Wool Yarn	Rug Yarn	Total Company
Sales		$200,000			$155,000			$197,000		$552,000
Costs of goods sold:
Variable costs	$(48,000)	$(18,600)	$(37,150)	$(103,750)
Fixed costs	(32,000)	(12,400)	(24,780)	(69,180)
Total cost of goods sold	$(80,000)	$(31,000)	$(61,930)	$(172,930)
Gross profit	$120,000	$124,000	$135,070	$379,070
Operating expenses:
Variable expenses	$(5,000)	$(7,750)	$(53,130)	$(65,880)
Fixed expenses	(89,000)	(77,500)	(106,200)	(272,700)
Total operating expenses	$(94,000)	$(85,250)	$(159,330)	$(338,580)
Operating income (loss)	$26,000	$38,750	$(24,260)	$40,490

Complete the following table using the data in the preceding income statement to compare the effects of dropping the rug yarn line of products. If required, use a minus sign to indicate a loss.

	ContinueRugYarn (Alternative 1)	Discontinue RugYarn (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 0c3cab04bff7fba_1	$fill in the blank 0c3cab04bff7fba_2	$fill in the blank 0c3cab04bff7fba_3
Costs:
Variable	fill in the blank 0c3cab04bff7fba_4	fill in the blank 0c3cab04bff7fba_5	fill in the blank 0c3cab04bff7fba_6
Fixed	fill in the blank 0c3cab04bff7fba_7	fill in the blank 0c3cab04bff7fba_8	fill in the blank 0c3cab04bff7fba_9
Profit (loss)	$fill in the blank 0c3cab04bff7fba_10	$fill in the blank 0c3cab04bff7fba_11	$fill in the blank 0c3cab04bff7fba_12

Question Content Area

Final Questions

Answer the following question (1), then fill in table (2).

1. After reviewing work on the Continue/Discontinue panel, should WoolCorp continue (Alternative 1) or discontinue (Alternative 2) the rug yarn product line?

Continue (Alternative 1).Discontinue (Alternative 2).The company is indifferent between Alternative 1 and Alternative 2.

2. The following table shows several business decisions that might need to be made across the top row. Along the left-hand column, there are important factors to consider.

Select the factor(s) that are important to the decision. Select all that apply. If the factor is not important to any of the decisions, select "yes" on the "Not Important" dropdown, otherwise select "no".

	Lease or Sell	Sell or Process Further	Special Price Order	Make or Buy	Continue or Discontinue	Production Bottleneck	Not Important
Impact on regular prices	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Contribution margin per bottleneck hour	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Differential revenue is more than differential cost	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Supplier price is less than WoolCorp's variable cost per unit	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Sunk costs	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo
Robinson-Patman Act	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo	YesNo

Question 9

Mastery Problem: Process Cost Systems

Grainy Goodness Company

Grainy Goodness Company manufactures granola cereal by a series of three processes, beginning materials such as oats, sweeteners, and nuts being introduced in the Mixing Department. From the Mixing Department, the materials pass through the Baking and Packaging departments, emerging as boxed granola cereal ready for shipment to retail outlets. Direct materials are added at the beginning of each process, and conversion costs are incurred evenly throughout production in each department.

During March, the President and sole stockholder, Jonathan Groat, reviewed the Cost of Production Report for the Mixing Department. He is concerned that the Mixing Department may not be operating efficiently, and asks for help.

Question Content Area

Cost of Production

Jonathan has noticed that his production manager has omitted some of the data on the Cost of Production. Determine the missing information. If there is no amount or an amount is zero, enter "0". Round per-unit computations to the nearest cent, if required.

Grainy Goodness Company
Cost of Production Report-Mixing Department
For the Month Ended March 31
Unit Information
Units charged to production:
Inventory in process, March 1	2,000
Received from materials storeroom	38,000
Total units accounted for by the Mixing Department	40,000
Units to be assigned costs:
		Equivalent Units
	Whole Units	Direct Materials	Conversion
Inventory in process, March 1 (35% completed)	2,000	fill in the blank b30c90fc8001078_1	fill in the blank b30c90fc8001078_2
Started and completed in March	35,000	35,000	35,000
Transferred to Baking Department in March	37,000	fill in the blank b30c90fc8001078_3	fill in the blank b30c90fc8001078_4
Inventory in process, March 31 (90% completed)	3,000	fill in the blank b30c90fc8001078_5	fill in the blank b30c90fc8001078_6
Total units to be assigned costs	40,000	fill in the blank b30c90fc8001078_7	fill in the blank b30c90fc8001078_8
Cost Information
Cost per equivalent unit:
	Direct Materials	Conversion
Total costs for March in Mixing Department	$40,660	$37,050
Total equivalent units	fill in the blank b30c90fc8001078_9	fill in the blank b30c90fc8001078_10
Cost per equivalent unit	$fill in the blank b30c90fc8001078_11	$fill in the blank b30c90fc8001078_12
Costs assigned to production:
	Direct Materials	Conversion	Total
Inventory in process, March 1	$2,200	$525	$2,725
Costs incurred in March			77,710
Total costs accounted for by the Mixing Department			$80,435
Cost allocated to completed and partially completed units:
Inventory in process, March 1-balance			$2,725
To complete inventory in process, March 1	fill in the blank b30c90fc8001078_13	1,235	1,235
Cost of completed March 1 work in process			$3,960
Started and completed in March	37,450	33,250	70,700
Transferred to Baking Department in March			$fill in the blank b30c90fc8001078_14
Inventory in process, March 31	3,210	2,565	fill in the blank b30c90fc8001078_15
Total costs assigned by the Mixing Department			$fill in the blank b30c90fc8001078_16

Question Content Area

February Cost Analysis

Determine the cost per unit of direct materials and for conversion for the month of February using the completed data on the Cost of Production. Round your per-unit computations to the nearest cent, if required.

Cost Analysis for February - Mixing Department
	Amount	Equivalent Units	Cost per Unit
Direct Materials in inventory in process, March 1	$fill in the blank 5ac112ff8026fe5_1	fill in the blank 5ac112ff8026fe5_2	$fill in the blank 5ac112ff8026fe5_3
Conversion costs in inventory in process, March 1	fill in the blank 5ac112ff8026fe5_4	fill in the blank 5ac112ff8026fe5_5	fill in the blank 5ac112ff8026fe5_6
		Total cost per unit	$fill in the blank 5ac112ff8026fe5_7

Question Content Area

March Cost Analysis

Determine the cost per unit of direct materials and for conversion for the month of March using the completed data on the Cost of Production. Round per-unit computations to the nearest cent, if required.

Cost Analysis for March- Mixing Department
	Amount	Equivalent Units	Cost per Unit
Costs for March: Direct Materials	$fill in the blank a525df01203bfb1_1	fill in the blank a525df01203bfb1_2	$fill in the blank a525df01203bfb1_3
Costs for March: Conversion	fill in the blank a525df01203bfb1_4	fill in the blank a525df01203bfb1_5	fill in the blank a525df01203bfb1_6
		Total cost per unit	$fill in the blank a525df01203bfb1_7

Question Content Area

Mixing Dept. Evaluation

After reviewing your work on the February Cost Analysis and March Cost Analysis, assist Jonathan Groat in evaluating the Mixing Department's performance by answering the following questions:

In March, was the Mixing Department's total cost per unit higher or lower than in February?

HigherLowerNo difference

For which component was the cost per unit for March higher than in February?

Conversion costsDirect material costsBoth were higher for MarchNeither were higher for March

What is most probably recommendation to Jonathan Groat given computations?

Investigate a detailed breakdown of conversion costs to determine the source of the higher per-unit cost.Investigate a detailed breakdown of direct materials cost to determine the source of the higher per-unit cost.Look into creating higher incentives for administrative staff in order to create more effective reporting procedures.Pay higher commissions to salespeople to spur sales.

Question Content Area

Journal

On March 31, using the data provided on the Cost of Production, journalize the entry to move the appropriate amount of cost from the Mixing Department to the Baking Department. If an amount box does not require an entry, leave it blank.

Mar. 31	Factory Overhead-MixingFactory Overhead-BakingFactory Overhead-PackagingWork in Process-BakingWork in Process-Mixing	- Select -	- Select -
	Factory Overhead-MixingFactory Overhead-BakingFactory Overhead-PackagingWork in Process-BakingWork in Process-Mixing	- Select -	- Select -