Question1) Classification of Costs as Period or Product Costs [LO2]
Suppose that you have been given a summer job at Fairwings Avionics, a company that manufactures sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before approving such a loan.
Required:
Classify each cost listed below as either a product cost or a period cost for purposes of preparing the financial statements for the bank.
1. The cost of the memory chips used in radar set.
2. Factory heating costs.
3. Factory equipment maintenance costs.
4. Training costs for new administrative employees.
5. The cost of the solder that is used in assembling the radar sets.
6. The travel costs of the company’s salespersons.
7. Wages and salaries of factory security personnel.
8. The cost of air-conditioning executive offices.
9. Wages and salaries in the department that handles billing customers.
10. Depreciation on the equipment in the fitness room used by factory workers.
11. Telephone expenses incurred by factory management.
12. The costs of shipping completed radar sets to customers.
13. The wages of the workers who assemble the radar sets.
14. The president’s salary.
15. Health insurance premiums for factory personnel.
Question2) High-Low Method [LO4]
The Edelweiss Hotel in Vail, Colorado, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel’s business is highly seasonal, with peaks occurring during the ski season and in the summer. Month Occupancy Days Electrical Costs January . . . . . . . . . 2,604 $6,257 February . . . . . . . . 2,856 $6,550 March . . . . . . . . . . . 3,534 $7,986 April . . . . . . . . . . . 1,440 $4,022 May . . . . . . . . . . . . 540 $2,289 June. . . . . . . . . . . 1,116 $3,591 July . . . . . . . . . . . . . 3,162 $7,264 August . . . . . . . . . 3,608 $8,111 September . . . . . . 1,260 $3,707 October . . . . . . . . . 186 $1,712 November . . . . . . . 1,080 $3,321 December . . . . . . . 2,046 $5,196
Required:
1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent.
2. What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month?
Question3) Traditional and Contribution Format Income Statements [LO5]
Redhawk, Inc., is a merchandiser that provided the following information: Number of units sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15 Variable selling expense per unit . . . . . . . . . . . . . . . . . . . $2 Variable administrative expense per unit . . . . . . . . . . . . . . $1 Total fi xed selling expense . . . . . . . . . . . . . . . . . . . . . . . . $20,000 Total fi xed administrative expense . . . . . . . . . . . . . . . . . . . $15,000 Merchandise inventory, beginning balance . . . . . . . . . . . . $12,000 Merchandise inventory, ending balance . . . . . . . . . . . . . . $22,000 Merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000
Required:
1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.
Question4) Compute the Predetermined Overhead Rate [LO1]
Logan Products computes its predetermined overhead rate annually on the basis of direct laborhours. At the beginning of the year, it estimated that 40,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $466,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $3.00 per direct labor-hour. Logan’s actual manufacturing overhead for the year was $713,400 and its actual total direct labor was 41,000 hours.
Required:
Compute the company’s predetermined overhead rate for the year.
Question5) Schedules of Cost of Goods Manufactured and Cost of Goods Sold [LO6]
Parmitan Corporation has provided the following data concerning last month’s manufacturing operations. Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,000 Indirect materials included in manufacturing overhead . . . . . . . . . . . . . . . $8,000 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,000 Manufacturing overhead applied to work in process . . . . . . . . . . . . . . . . . $41,000 Underapplied overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,000 Beginning Ending Inventories: Raw materials . . . . . . . . . . . . . . . . . . . $24,000 $6,000 Work in process . . . . . . . . . . . . . . . . . . . $41,000 $38,000 Finished goods . . . . . . . . . . . . . . . . . . $86,000 $93,000
Required:
1. Prepare a schedule of cost of goods manufactured for the month.
2. Prepare a schedule of cost of goods sold for the month.
Question6) Schedules of Cost of Goods Manufactured and Cost of Goods Sold;
Income Statement [LO6] The following data from the just completed year are taken from the accounting records of Eccles Company: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Raw material purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing overhead applied to work in process . . . . . . . . . . . Actual manufacturing overhead costs . . . . . . . . . . . . . . . . . . . . . . $643,000 $90,000 $132,000 $100,000 $43,000 $210,000 $220,000
Inventories: Raw materials . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . .
Beginning of Year $8,000 $5,000 $70,000 End of Year $10,000 $20,000 $25,000
Required:
1. Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.
2.Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
Question7) Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4]
Data for Herron Corporation are shown below: Per Unit Percent of Sales Selling price . . . . . . . . . . . . . . . . . . $75 100% Variable expenses . . . . . . . . . . . . . 45 60% Contribution margin . . . . . . . . . . . . $30 40% Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.
Required:
1. The marketing manager believes that an $8,000 increase in the monthly advertising budget would increase monthly sales by $15,000. Should the advertising budget be increased?
2. Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $3 per unit. The marketing manager believes that the higher-quality product would increase sales by 15% per month. Should the higher-quality components be used?
Question8) Compute the Level of Sales Required to Attain a Target Profit [LO5]
Liman Corporation has a single product whose selling price is $140 and whose variable expense is $60 per unit. The company’s monthly fixed expense is $40,000.
Required:
1. Using the equation method, solve for the unit sales that are required to earn a target profit of $6,000.
2. Using the formula method, solve for the dollar sales that are required to earn a target profit of $8,000.
Question9) Compute the Break-Even Point [LO6]
Maxson Products distributes a single product, a woven basket whose selling price is $8 and whose variable cost is $6 per unit. The company’s monthly fixed expense is $5,500.
Required:
1. Solve for the company’s break-even point in unit sales using the equation method.
2. Solve for the company’s break-even point in sales dollars using the equation method and the CM ratio.
3. Solve for the company’s break-even point in unit sales using the formula method.
4. Solve for the company’s break-even point in sales dollars using formula method and the CM ratio.