Test Bank of Managerial Accounting 16th edition By Garrison

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Test Bank of Managerial Accounting 16th edition By Garrison

 

Managerial Accounting, 16e (Garrison)

Appendix 2A  Activity-Based Absorption Costing

 

1) Feauto Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, I63E and E76I, about which it has provided the following data:

 

Direct materials per unit $ 19.90   $ 54.40  
Direct labor per unit $ 12.00   $ 31.50  
Direct labor-hours per unit   0.80     2.10  
Annual production (units)   30,000     10,000  

 

The company’s estimated total manufacturing overhead for the year is $2,063,250 and the company’s estimated total direct labor-hours for the year is 45,000.

 

The company is considering using a form of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 720,000  
Preparing batches (batches)   263,250  
Product support (product variations)   1,080,000  
Total $ 2,063,250  

 

  Expected Activity
  I63E E76I Total
DLHs 24,000 21,000 45,000
Batches 1,080 675 1,755
Product variations 2,115 1,485 3,600

 

The manufacturing overhead that would be applied to a unit of product I63E under the company’s traditional costing system is closest to:

  1. A) $12.80
  2. B) $39.35
  3. C) $76.03
  4. D) $36.68

 

Answer:  D

Explanation:

Product I63E 30,000 units × 0.80 direct labor-hours per unit 24,000
Product E76I 10,000 units × 2.10 direct labor-hours per unit 21,000
Total direct labor-hours 45,000

 

Predetermined overhead rate = $2,063,250 ÷ 45,000 direct labor-hours = $45.85 per direct labor-hour

 

Overhead applied to a unit of product I63E = $45.85 per direct labor-hours × 0.80 direct labor-hours per unit = $36.68 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

2) Feauto Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, I63E and E76I, about which it has provided the following data:

 

  I63E E76I  
Direct materials per unit $ 19.90   $ 54.40  
Direct labor per unit $ 12.00   $ 31.50  
Direct labor-hours per unit   0.80     2.10  
Annual production (units)   30,000     10,000  

 

The company’s estimated total manufacturing overhead for the year is $2,063,250 and the company’s estimated total direct labor-hours for the year is 45,000.

 

The company is considering using a form of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 720,000  
Preparing batches (batches)   263,250  
Product support (product variations)   1,080,000  
Total $ 2,063,250  

 

  Expected Activity
  I63E E76I Total
DLHs 24,000 21,000 45,000
Batches 1,080 675 1,755
Product variations 2,115 1,485 3,600

 

The manufacturing overhead that would be applied to a unit of product E76I under the activity-based costing system is closest to:

  1. A) $88.28
  2. B) $96.29
  3. C) $184.57
  4. D) $10.13

 

Answer:  A

Explanation:  The activity rates for each activity cost pool are computed as follows:

 

  Total Cost Total Activity Activity Rate  
Assembling products $ 720,000 45,000 DLHs $ 16 per DLH
Preparing batches   263,250 1,755 batches $ 150 per batch
Product support $ 1,080,000 3,600 variations $ 300 per variation

 

The overhead cost charged to Product E76I is:

 

  Total Per Unit Percent of Sales  
Assembling products $ 16 per DLH 21,000 DLHs $ 336,000
Preparing batches $ 150 per batch 675 batches   101,250
Product support $ 300 per variation 1,485 variations   445,500
            $ 882,750

 

Manufacturing overhead applied to a unit of product E76I = $882,750 ÷ 10,000 units = $88.28 per unit

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

3) Coudriet Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, P93S and N40S, about which it has provided the following data:

 

  P93S N40S  
Direct materials per unit $ 21.90   $ 54.80  
Direct labor per unit $ 8.80   $ 13.20  
Direct labor-hours per unit   0.80     1.20  
Annual production (units)   35,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $2,172,580 and the company’s estimated total direct labor-hours for the year is 46,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Direct labor support (DLHs) $ 552,000  
Setting up machines (setups)   419,980  
Part administration (part types)   1,200,600  
Total $ 2,172,580  

 

  Expected Activity  
  P93S N40S Total
DLHs 28,000 18,000 46,000
Setups 2,162 1,656 3,818
Part types 1,886 2,116 4,002

 

The unit product cost of product P93S under the company’s traditional costing system is closest to:

  1. A) $68.48
  2. B) $63.26
  3. C) $30.70
  4. D) $40.30

 

Answer:  A

Explanation:  Direct labor-hour calculation:

 

Product P93S 35,000 units × 0.80 direct labor-hours per unit 28,000
Product R28K 15,000 units × 1.20 direct labor-hours per unit 18,000
Total direct labor-hours 46,000

 

Predetermined overhead rate = $2,172,580 ÷ 46,000 direct labor-hours = $47.23 per direct labor-hour

 

Overhead per unit of product P93S = $47.23 per direct labor-hour × 0.80 direct labor-hours per unit = $37.78 per unit

 

Direct materials $ 21.90  
Direct labor   8.80  
Overhead   37.78  
Unit product cost $ 68.48  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

4) Coudriet Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, P93S and N40S, about which it has provided the following data:

 

  P93S N40S  
Direct materials per unit $ 21.90   $ 54.80  
Direct labor per unit $ 8.80   $ 13.20  
Direct labor-hours per unit   0.80     1.20  
Annual production (units)   35,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $2,172,580 and the company’s estimated total direct labor-hours for the year is 46,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Direct labor support (DLHs) $ 552,000  
Setting up machines (setups)   419,980  
Part administration (part types)   1,200,600  
Total $ 2,172,580  

 

  Expected Activity  
  P93S N40S Total
DLHs 28,000 18,000 46,000
Setups 2,162 1,656 3,818
Part types 1,886 2,116 4,002

 

The unit product cost of product N40S under the activity-based costing system is closest to:

  1. A) $68.00
  2. B) $68.86
  3. C) $124.68
  4. D) $136.86

 

Answer:  D

Explanation:  The activity rates for each activity cost pool are computed as follows:

 

  Total Cost Total Activity Activity Rate  
Direct labor support $ 552,000 46,000 DLHs $ 12 per DLH
Setting up machines $ 419,980 3,818  per setup $ 110  per setup
Part administration $ 1,200,600 4,002  per part type $ 300  per part type

 

The overhead cost charged to Product N40S is:

 

  Activity Rate Activity ABC Cost  
Direct labor support $ 12 per DLH 18,000 DLHs $ 216,000
Setting up machines $ 110  per setup 1,656  per setup   182,160
Part administration $ 300  per part type 2,116  per part type   634,800
              1,032,960

 

Overhead cost per unit of Product N40S = $1,032,960 ÷ 15,000 units = $68.86 per unit

 

   
Direct materials $ 54.80  
Direct labor   13.20  
Overhead   68.86  
Unit product cost $ 136.86  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

5) Poma Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R78S and N32Y, about which it has provided the following data:

 

  R78S N32Y  
Direct materials per unit $ 27.20   $ 54.70  
Direct labor per unit $ 8.80   $ 22.00  
Direct labor-hours per unit   0.4     1.0  
Annual production (units)   35,000     10,000  

 

The company’s estimated total manufacturing overhead for the year is $1,427,040 and the company’s estimated total direct labor-hours for the year is 24,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 672,000  
Preparing batches (batches)   255,840  
Product support (product variations)   499,200  
Total $ 1,427,040  

 

  Expected Activity
  R78S N32Y Total
DLHs 14,000 10,000 24,000
Batches 816 1,152 1,968
Product variations 840 408 1,248

 

The unit product cost of product R78S under the company’s traditional costing system is closest to:

  1. A) $36.00
  2. B) $59.83
  3. C) $47.20
  4. D) $59.78

 

Answer:  D

Explanation:  Direct labor-hour calculation:

 

Product R78S 35,000 units × 0.4 direct labor-hours per unit 14,000
Product N32Y 10,000 units × 1.0 direct labor-hours per unit 10,000
Total direct labor-hours 24,000

 

Predetermined overhead rate = $1,427,040 ÷ 24,000 direct labor-hours = $59.46 per direct labor-hour

 

Overhead applied to each unit of product R78S = $59.46 per direct labor-hour × 0.4 direct labor-hours per unit = $23.78 per unit

 

Direct materials $ 27.20  
Direct labor   8.80  
Overhead   23.78  
Unit product cost $ 59.78  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

6) Poma Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R78S and N32Y, about which it has provided the following data:

 

  R78S N32Y  
Direct materials per unit $ 27.20   $ 54.70  
Direct labor per unit $ 8.80   $ 22.00  
Direct labor-hours per unit   0.4     1.0  
Annual production (units)   35,000     10,000  

 

The company’s estimated total manufacturing overhead for the year is $1,427,040 and the company’s estimated total direct labor-hours for the year is 24,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 672,000  
Preparing batches (batches)   255,840  
Product support (product variations)   499,200  
Total $ 1,427,040  

 

  Expected Activity
  R78S N32Y Total
DLHs 14,000 10,000 24,000
Batches 816 1,152 1,968
Product variations 840 408 1,248

 

The unit product cost of product N32Y under the activity-based costing system is closest to:

  1. A) $136.00
  2. B) $76.70
  3. C) $59.30
  4. D) $136.16

 

Answer:  A

Explanation:  The activity rates for each activity cost pool are computed as follows:

 

  Total Cost Total Activity Activity Rate  
Assembling products $ 672,000 24,000 DLHs $ 28 per DLH
Preparing batches $ 255,840 1,968 batches $ 130 per batch
Product support $ 499,200 1,248 variations $ 400 per variation

 

 

The overhead cost charged to Product N32Y is:

 

  Activity Rate Activity ABC Cost  
Assembling products $ 28 per DLH 10,000 DLHs $ 280,000
Preparing batches $ 110 per setup 1,656 per setup   182,160
Product support $ 400 per variation 408 variations   163,200
              592,960

 

Overhead per unit of Product N32Y = $592,960 ÷ 10,000 units = $59.30 per unit

 

Direct materials $ 54.70  
Direct labor   22.00  
Overhead   59.30  
Unit product cost $ 136.00  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

7) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756.

 

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 

    Expected Activity
Activity Cost Pool Estimated Overhead Costs Product A Product B Total
Activity 1 $ 31,031 1,000 300 1,300
Activity 2 $ 22,249 1,600 300 1,900
General Factory $ 15,476 200 200 400
Total $ 68,756      

 

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

 

The predetermined overhead rate under the traditional costing system is closest to:

  1. A) $11.71
  2. B) $38.69
  3. C) $171.89
  4. D) $23.87

 

Answer:  C

Explanation:  Direct labor-hour calculation:

 

Product A 500 units × 0.4 direct labor-hours 200
Product B 1,000 units × 0.2 direct labor-hours 200
Total direct labor-hours 400

 

Predetermined overhead rate = Total estimated overhead ÷ Total estimated direct labor-hours

= $68,756 ÷ 400 direct labor-hours = $171.89 per direct labor-hour

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

8) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756.

 

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 

    Expected Activity
Activity Cost Pool Estimated Overhead Costs Product A Product B Total
Activity 1 $ 31,031 1,000 300 1,300
Activity 2 $ 22,249 1,600 300 1,900
General Factory $ 15,476 200 200 400
Total $ 68,756      

 

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

 

The overhead cost per unit of Product B under the traditional costing system is closest to:

  1. A) $2.34
  2. B) $7.74
  3. C) $4.77
  4. D) $34.38

 

Answer:  D

Explanation:  Direct labor-hour calculation:

 

Product A 500 units × 0.4 direct labor-hours 200
Product B 1,000 units × 0.2 direct labor-hours 200
Total direct labor-hours 400

 

Predetermined overhead rate = Total estimated overhead ÷ Total estimated direct labor-hours

= $68,756 ÷ 400 direct labor-hours = $171.89 per direct labor-hour

 

Overhead cost per unit of B = $171.89 per direct labor-hour × 0.2 direct labor-hours per unit

= $34.38 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

9) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756.

 

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 

    Expected Activity
Activity Cost Pool Estimated Overhead Costs Product A Product B Total
Activity 1 $ 31,031 1,000 300 1,300
Activity 2 $ 22,249 1,600 300 1,900
General Factory $ 15,476 200 200 400
Total $ 68,756      

 

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

 

The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

  1. A) $13.91
  2. B) $11.71
  3. C) $74.16
  4. D) $36.19

 

Answer:  B

Explanation:  Activity rate for Activity 2 = $22,249 ÷ 1,900 = $11.71

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

10) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is $68,756.

 

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 

    Expected Activity
Activity Cost Pool Estimated Overhead Costs Product A Product B Total
Activity 1 $ 31,031 1,000 300 1,300
Activity 2 $ 22,249 1,600 300 1,900
General Factory $ 15,476 200 200 400
Total $ 68,756      

 

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

 

The overhead cost per unit of Product B under the activity-based costing system is closest to:

  1. A) $45.84
  2. B) $7.74
  3. C) $34.38
  4. D) $18.41

 

Answer:  D

Explanation:  The activity rates for each activity cost pool are computed as follows:

 

  Total Cost Total Activity Activity Rate  
Activity 1 $ 31,031   1,300 $ 23.87    
Activity 2 $ 22,249   1,900 $ 11.71    
General Factory $ 15,476      400 $ 38.69    

 

The overhead cost charged to Product B is:

 

  Activity Rate Activity ABC Cost    
Activity 1 $ 23.87   300 $ 7,161    
Activity 2 $ 11.71   300 $ 3,513    
General Factory $ 38.69   200 $ 7,738    
          $ 18,412    

 

Overhead cost per unit of Product B = $18,412 ÷ 1,000 units = $18.41 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

11) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 

Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost    
Machine Setups Number of setups 400 $ 150,000    
Quality Control Number of inspections 1,500 $ 180,000    
Other Overhead Machine hours 30,000 $ 480,000    
     

 

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 

  Model #19 Model #36 Model #58
Direct material cost $ 400   $ 540   $ 310  
Direct labor cost $ 810   $ 600   $ 220  
Number of setups   2     3     1  
Number of inspections   1     3     1  
Number of machine hours   4     8     10  

 

Under the traditional costing system, what would be the selling price of one unit of Model #36?

  1. A) $2,536
  2. B) $2,712
  3. C) $4,080
  4. D) $5,506

 

Answer:  C

Explanation:

Direct materials $ 540  
Direct labor   600  
Manufacturing overhead (1.5 × $600)   900  
Unit product cost $ 2,040  
Selling price (2.00 × $2,040) $ 4,080  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

12) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 

Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost    
Machine Setups Number of setups 400 $ 150,000    
Quality Control Number of inspections 1,500 $ 180,000    
Other Overhead Machine hours 30,000 $ 480,000    
     

 

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 

  Model #19 Model #36 Model #58
Direct material cost $ 400   $ 540   $ 310  
Direct labor cost $ 810   $ 600   $ 220  
Number of setups   2     3     1  
Number of inspections   1     3     1  
Number of machine hours   4     8     10  

 

Under the activity-based costing system, what would be the selling price of one unit of Model #36?

  1. A) $2,536
  2. B) $2,712
  3. C) $4,080
  4. D) $5,506

 

Answer:  D

Explanation:  The activity rates are computed as follows:

 

Activity Cost Pools Total Cost Total Activity Activity Rate  
Machine Setups $ 150,000 400  setups $ 375  per setup
Quality Control $ 180,000 1,500  inspections $ 120  per inspection
Other Overhead $ 480,000 30,000  machine-hours $ 16  per machine-hour

 

 

The overhead cost charged to Model #36 is:

 

Activity Cost Pools Activity Rate Activity ABC Cost
Machine Setups $ 375  per setup 3  setups $ 1,125  
Quality Control $ 120  per inspection 3  inspections   360  
Other Overhead $ 16  per machine-hour 8  machine-hours   128  
Total overhead cost           $ 1,613  

 

Direct materials $ 540  
Direct labor   600  
Manufacturing overhead (1.5 × $600)   1,613  
Unit product cost $ 2,753  
Selling price (2.00 × $2,753) $ 5,506  

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

13) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 

Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost    
Machine Setups Number of setups 400 $ 150,000    
Quality Control Number of inspections 1,500 $ 180,000    
Other Overhead Machine hours 30,000 $ 480,000    

 

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 

  Model #19 Model #36 Model #58
Direct material cost $ 400   $ 540   $ 310  
Direct labor cost $ 810   $ 600   $ 220  
Number of setups   2     3     1  
Number of inspections   1     3     1  
Number of machine hours   4     8     10  

 

In comparing the traditional system with the activity-based costing system, which of Njombe’s Models had higher unit product costs under the traditional system?

  1. A) #19
  2. B) #58
  3. C) #19 and #58
  4. D) #36 and #58

 

Answer:  A

Explanation:  The activity rates are computed as follows:

 

Activity Cost Pools Total Cost Total Activity Activity Rate  
Machine Setups $ 150,000 400  setups $ 375  per setup
Quality Control $ 180,000 1,500  inspections $ 120  per inspection
Other Overhead $ 480,000 30,000  machine-hours $ 16  per machine-hour

 

The overhead cost charged to Model #19 is:

 

Activity Cost Pools Activity Rate Activity ABC

Cost

Machine Setups $ 375  per setup 2  setups $ 750  
Quality Control $ 120  per inspection 1  inspection   120  
Other Overhead $ 16  per machine-hour 4  machine-hours   64  
Total overhead cost           $ 934  

 

The overhead cost charged to Model # 36 is:

 

Activity Cost Pools Activity Rate Activity ABC Cost
Machine Setups $ 375  per setup 3  setups $ 1,125  
Quality Control $ 120  per inspection 3  inspections   360  
Other Overhead $ 16  per machine-hour 8  machine-hours   128  
Total overhead cost           $ 1,613  

 

The overhead cost charged to Model # 58 is:

 

Activity Cost Pools Activity Rate Activity ABC

Cost

Machine Setups $ 375  per setup 1  setup $ 375  
Quality Control $ 120  per inspection 1  inspection   120  
Other Overhead $ 16  per machine-hour 10  machine-hours   160  
Total overhead cost           $ 655  

 

Traditional product costing overhead cost:

 

  Model #19 Model #36 Model #58  
Direct labor cost $ 810   $ 600   $ 220  
Overhead cost (150% of direct labor cost) $ 1,125   $ 900   $ 330  

 

The overhead costs are the only difference in unit product costs between the traditional costing system and the activity-based costing system. Therefore, Model #19 is the only product that has a higher unit product cost under the traditional system.

Difficulty: 3 Hard

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

14) Look Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, N06D and M09K, about which it has provided the following data:

 

  N06D M09K  
Direct materials per unit $ 17.70   $ 62.50  
Direct labor per unit $ 5.00   $ 16.00  
Direct labor-hours per unit   0.50     1.60  
Annual production (units)   40,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $2,532,200 and the company’s estimated total direct labor-hours for the year is 44,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

 
Supporting direct labor (DLHs) $ 880,000  
Setting up machines (setups)   376,200  
Parts administration (part types)   1,276,000  
Total $ 2,532,200  

 

  Expected Activity
  N06D M09K Total
DLHs 20,000 24,000 44,000
Setups 1,408 1,100 2,508
Part types 1,540 1,012 2,552

 

The manufacturing overhead that would be applied to a unit of product N06D under the company’s traditional costing system is closest to:

  1. A) $28.78
  2. B) $10.00
  3. C) $63.31
  4. D) $34.53

 

Answer:  A

Explanation:  Direct labor-hour calculation:

 

Product N06D 40,000 units × 0.50 direct labor-hours per unit 20,000
Product M09K 15,000 units × 1.60 direct labor-hours per unit 24,000
Total direct labor-hours 44,000

 

 

 

Predetermined overhead rate = Total estimated overhead cost ÷ Total estimated direct labor-hours
= $2,532,200 ÷ 44,000 direct labor-hours = $57.55 per direct labor-hour

 

Overhead applied to product N06D = $57.55 per direct labor-hour × 0.50 direct labor-hours per unit

= $28.78 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

15) Look Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, N06D and M09K, about which it has provided the following data:

 

  N06D M09K  
Direct materials per unit $ 17.70   $ 62.50  
Direct labor per unit $ 5.00   $ 16.00  
Direct labor-hours per unit   0.50     1.60  
Annual production (units)   40,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $2,532,200 and the company’s estimated total direct labor-hours for the year is 44,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Supporting direct labor (DLHs) $ 880,000  
Setting up machines (setups)   376,200  
Parts administration (part types)   1,276,000  
Total $ 2,532,200  

 

  Expected Activity
  N06D M09K Total
DLHs 20,000 24,000 44,000
Setups 1,408 1,100 2,508
Part types 1,540 1,012 2,552

 

The manufacturing overhead that would be applied to a unit of product M09K under the activity-based costing system is closest to:

  1. A) $76.73
  2. B) $92.08
  3. C) $11.00
  4. D) $168.81

 

Answer:  A

Explanation:  The activity rates for each activity cost pool are computed as follows:

 

  Total Cost Total Activity Activity Rate  
Supporting direct labor $ 880,000 44,000  DLHs $ 20  per DLH
Setting up machines   376,200 2,508  setups $ 150  per setup
Parts administration $ 1,276,000 2,552  part types $ 500  per part type

 

 

The overhead cost charged to Product M09K is:

 

  Activity Rate Activity ABC Cost  
Supporting direct labor $ 20  per DLH 24,000  DLHs $ 480,000
Setting up machines $ 150  per setup 1,100  setups   165,000
Parts administration $ 500  per part type 1,012  part types   506,000
            $ 1,151,000

 

Overhead applied to a unit of product M09K = $1,151,000 ÷ 15,000 units = $76.73 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

16) Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, D31X and U75X, about which it has provided the following data:

 

  D31X U75X  
Direct materials per unit $ 29.20   $ 47.40  
Direct labor per unit $ 1.10   $ 23.10  
Direct labor-hours per unit   0.10     2.10  
Annual production (units)   35,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $1,147,650 and the company’s estimated total direct labor-hours for the year is 35,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 140,000  
Preparing batches (batches)   241,150  
Axial milling (MHs)   766,500  
Total $ 1,147,650  

 

  D31X U75X Total
Assembling products 3,500 31,500 35,000
Preparing batches 560 1,295 1,855
Axial milling 1,540 1,015 2,555

 

Required:

 

  1. Determine the manufacturing overhead cost per unit of each of the company’s two products under the traditional costing system.
  2. Determine the manufacturing overhead cost per unit of each of the company’s two products under activity-based costing system.

 

Answer:

  1. Traditional Manufacturing Overhead Costs

 

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

 

  D31X U75X  
Direct labor-hours   0.10     2.10  
Predetermined overhead rate per DLH $ 32.79   $ 32.79  
Manufacturing overhead cost per unit $ 3.28   $ 68.86  

 

  1. ABC Manufacturing Overhead Costs

 

  Estimated Overhead

Cost

Total

Expected Activity

Activity Rate  
Assembling products $ 140,000 35,000  DLHs $ 4  per DLH
Preparing batches $ 241,150 1,855  batches $ 130  per batch
Axial milling $ 766,500 2,555  MHs $ 300  per MH

 

Overhead cost for D31X

 

  Activity Rate Activity ABC Cost  
Assembling products $ 4 per DLH 3,500  DLHs $ 14,000
Preparing batches $ 130 per batch 560  batches   72,800
Axial milling $ 300 per MH 1,540  MHs   462,000
Total           $ 548,800
Annual production (units)             35,000
Manufacturing overhead cost per unit           $ 15.68

 

Overhead cost for U75X

 

  Activity Rate Activity ABC Cost  
Assembling products $ 4 per DLH 31,500  DLHs $ 126,000
Preparing batches $ 130 per batch 1,295  batches   168,350
Axial milling $ 300 per MH 1,015  MHs   304,500
Total           $ 598,850
Annual production (units)             15,000
Manufacturing overhead cost per unit           $ 39.92

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

17) Torri Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, B40W and C63J, about which it has provided the following data:

 

  B40W C63J  
Direct materials per unit $ 34.90   $ 63.70  
Direct labor per unit $ 20.80   $ 62.40  
Direct labor-hours per unit   0.80     2.40  
Annual production (units)   35,000     15,000  

 

The company’s estimated total manufacturing overhead for the year is $2,656,000 and the company’s estimated total direct labor-hours for the year is 64,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Assembling products (DLHs) $ 1,216,000  
Preparing batches (batches)   480,000  
Milling (MHs)   960,000  
Total $ 2,656,000  

 

Activities B40W C63J Total
Assembling products 28,000 36,000 64,000
Preparing batches 2,304 2,496 4,800
Milling 1,088 2,112 3,200

 

Required:

 

  1. Determine the unit product cost of each of the company’s two products under the traditional costing system.
  2. Determine the unit product cost of each of the company’s two products under activity-based costing system.

 

Answer:

  1. Traditional Unit Product Costs

 

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $2,656,000 ÷ 64,000 DLHs= $41.50 per DLH

 

 

  B40W C63J  
Direct materials $ 34.90   $ 63.70  
Direct labor   20.80     62.40  
Manufacturing overhead (0.8 DLHs × $41.50 per DLH; 2.4 DLHs × $41.50 per DLH)   33.20     99.60  
Unit product cost $ 88.90   $ 225.70  

 

  1. ABC Manufacturing Overhead Costs

 

  Estimated Overhead

Cost

Total

Expected Activity

Activity Rate  
Assembling products $ 1,216,000 64,000  DLHs $ 19  per DLH
Preparing batches $ 480,000 4,800  batches $ 100  per batch
Milling $ 960,000 3,200  MHs $ 300  per MH

 

Overhead cost for B40W

 

  Activity Rate Activity ABC Cost  
Assembling products $ 19  per DLH 28,000  DLHs $ 532,000
Preparing batches $ 100  per batch 2,304  batches   230,400
Milling $ 300  per MH 1,088  MHs   326,400
Total           $ 1,088,800

 

Overhead cost for C63J

 

  Activity Rate Activity ABC Cost  
Assembling products $ 19 per DLH 36,000  DLHs $ 684,000
Preparing batches $ 100 per batch 2,496  batches   249,600
Milling $ 300 per MH 2,112  MHs   633,600
Total           $ 1,567,200

 

  B40W C63J  
Direct materials $ 34.90   $ 63.70  
Direct labor   20.80     62.40  
Manufacturing overhead ($1,088,800 ÷ 35,000 units; $1,567,200 ÷ 15,000 units)   31.11     104.48  
Unit product cost $ 86.81   $ 230.58  

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

18) Cabigas Corporation manufactures two products, Product C and Product D. The company estimated it would incur $167,140 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor-hours. Data concerning the current period’s operations appear below:

 

  Product C Product D  
Estimated volume     2,000 units     2,700 units
Direct labor per unit     2.00 hours     0.80 hour
Direct labor-hours per unit   $ 21.50     $ 24.10  
Annual production (units)   $ 24.00     $ 9.60  

 

Required:

 

  1. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
  2. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor-hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

 

      Expected Activity  
Activity Cost Pool Estimated Overhead Costs Product C Product D Total
Machine setups $ 13,630   130 190 290
Purchase orders   85,750   750 1,000 1,750
General Factory   67,760   4,000 2,160 6,160
Total $ 167,140        

 

Determine the unit product cost of each product for the current period using the activity-based costing approach. General factory overhead is allocated based on direct labor-hours.

 

Answer:

  1. The expected total direct labor-hours during the period are computed as follows:

 

Product C: 2,000 units × 2.0 hours per unit 4,000 hours
Product D: 2,700 units × 0.8 hours per unit 2,160 hours
Total direct labor-hours 6,160 hours

 

Using these hours as a base, the predetermined overhead using direct labor-hours would be:

 

Predetermined overhead rate = Estimated total overhead cost ÷ Estimated total direct labor-hours = $167,140 ÷ 6,160 DLHs = $27.13 per DLH

 

 

Using this overhead rate, the unit product costs are:

 

  Product C Product D  
Direct materials $ 21.50   $ 24.10  
Direct labor   24.00     9.60  
Manufacturing overhead (2.0 DLHs × $27.13 per DLH; 0.8 DLHs × $27.13 per DLH)   54.27     21.71  
Total unit product cost $ 99.77   $ 55.41  

 

  1. The activity rates for each activity cost pool are as follows:

 

  Estimated Overhead

Cost

Expected Activity Activity Rate  
Machine setups $ 13,630 290  setups $ 47.00  per setup
Purchase orders $ 85,750 1,750  orders $ 49.00  per order
General factory $ 67,760 6,160  DLHs $ 11.00  per DLH

 

The overhead cost charged to Product C is:

 

  Activity Rate Activity Amount  
Machine setups $ 53.00  per setup 130  setups $ 6,110
Purchase orders $ 38.00  per order 750  orders   36,750
General factory $ 13.00  per DLH 4,000  DLHs   44,000
Total overhead cost           $ 86,860

 

The overhead cost charged to Product D is:

 

  Activity Rate Activity Amount  
Machine setups $ 53.00 per setup 160  setups $ 7,520
Purchase orders $ 38.00 per order 1,000  orders   49,000
General factory $ 13.00 per DLH 2,160  DLHs   23,760
Total overhead cost           $ 80,280

 

Overhead cost per unit:

 

Product C: $86,860 ÷ 2,000 units = $43.43 per unit.

Product D: $80,280 ÷ 2,700 units = $29.73 per unit.

 

Using activity based costing, the unit product cost of each product would be:

 

  Product C Product D  
Direct materials $ 21.50   $ 24.10  
Direct labor   24.00     9.60  
Manufacturing overhead   43.43     29.73  
Total unit product cost $ 88.93   $ 63.43  

 

Difficulty: 3 Hard

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

19) Welk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, H16Z and P25P, about which it has provided the following data:

 

  H16Z P25P  
Direct materials per unit $ 10.20   $ 50.50  
Direct labor per unit $ 8.40   $ 25.20  
Direct labor-hours per unit   0.40     1.20  
Annual production (units)   30,000     10,000  

 

The company’s estimated total manufacturing overhead for the year is $1,464,480 and the company’s estimated total direct labor-hours for the year is 24,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated Overhead Cost
Supporting direct labor (DLHs) $ 552,000  
Setting up machines (setups)   132,480  
Parts administration (part types)   780,000  
Total $ 1,464,480  

 

  H16Z P25P Total
Supporting direct labor 12,000 12,000 24,000
Setting up machines 864 240 1,104
Parts administration 600 960 1,560

 

Required:

 

  1. Determine the manufacturing overhead cost per unit of each of the company’s two products under the traditional costing system.
  2. Determine the manufacturing overhead cost per unit of each of the company’s two products under activity-based costing system.

 

Answer:

  1. Traditional Manufacturing Overhead Costs

 

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH

 

  D31X U75X  
Direct labor-hours   0.40     1.20  
Predetermined overhead rate per DLH $ 61.02   $ 61.02  
Manufacturing overhead cost per unit $ 24.41   $ 73.22  

 

  1. ABC Manufacturing Overhead Costs

 

  Estimated Overhead Cost Total Expected Activity Activity Rate  
Supporting direct labor $ 552,000 24,000  DLHs $ 23  per DLH
Setting up machines $ 132,480 1,104  setups $ 120  per setup
Parts administration $ 780,000 1,560  part types $ 500  per part type

 

Overhead cost for H16Z

 

  Activity Rate Activity ABC Cost  
Supporting direct labor $ 23  per DLH 12,000  DLHs $ 276,000
Setting up machines $ 120  per setup 864  setups   103,680
Parts administration $ 500  per part type 600  part types   300,000
Total           $ 679,680
Annual production (units)             30,000
Manufacturing overhead cost per unit           $ 22.66

 

Overhead cost for P25P

 

  Activity Rate Activity ABC Cost  
Supporting direct labor $ 23  per DLH 12,000  DLHs $ 276,000
Setting up machines $ 120  per setup 240  setups   28,800
Parts administration $ 500  per part type 960  part types   480,000
Total           $ 784,800
Annual production (units)             10,000
Manufacturing overhead cost per unit           $ 78.48

 

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

 

 

20) Werger Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, W82R and L48S, about which it has provided the following data:

 

  W82R L48S
Direct materials per unit $ 11.50 $ 62.90
Direct labor per unit $ 2.00 $ 13.00
Direct labor-hours per unit   0.20   1.30
Annual production (units)   45,000   10,000

 

The company’s estimated total manufacturing overhead for the year is $1,521,960 and the company’s estimated total direct labor-hours for the year is 22,000.

 

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 

Activities and Activity Measures Estimated

Overhead Cost

Supporting direct labor (DLHs) $ 352,000
Setting up machines (setups)   201,960
Parts administration (part types)   968,000
Total $ 1,521,960

 

  Activities W82R L48S Total
  Supporting direct labor 9,000 13,000 22,000
  Setting up machines 814 374 1,188
  Parts administration 924 1,012 1,936

 

Required:

 

  1. Determine the unit product cost of each of the company’s two products under the traditional costing system.
  2. Determine the unit product cost of each of the company’s two products under activity-based costing system.

 

Answer:

a.

Traditional Unit Product Costs

 

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH

 

 

    W82R L48S  
Direct materials $ 11.50 $ 62.90
Direct labor   2.00   13.00
Manufacturing overhead (0.20 DLHs × $69.18 per DLH; 1.3 DLHs × $69.18 per DLH)   13.84   89.93
Unit product cost $ 27.34 $ 165.83

 

b.

ABC Unit Product Costs.

 

  Estimated Overhead Cost Total Expected

Activity

Activity Rate  
Supporting direct labor $ 352,000 22,000  DLHs $ 16  per DLH
Setting up machines $ 201,960 1,188  setups   170  per setup
Parts administration $ 968,000 1,936  part types   500  per part type

 

Overhead cost for W82R

 

  Activity Rate Activity ABC Cost  
Supporting direct labor $ 16  per DLH 9,000  DLHs $ 144,000
Setting up machines $ 170  per setup 814  setups   138,380
Parts administration $ 500  per part type 924  part types   462,000
Total           $ 744,380

 

Overhead cost for L48S

 

  Activity Rate Activity ABC Cost  
Supporting direct labor $ 16  per DLH 13,000  DLHs $ 208,000
Setting up machines $ 170  per setup 374  setups   63,580
Parts administration $ 500  per part type 1,012  part types   506,000
Total           $ 777,580

 

    W82R L48S  
Direct materials $ 11.50 $ 62.90
Direct labor   2.00   13.00
Manufacturing overhead ($744,400 ÷ 45,000 units; $777,600 ÷ 10,000 units)   16.54   77.76
Unit product cost $ 30.04 $ 153.66

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

Managerial Accounting, 16e (Garrison)

Appendix 2B  The Predetermined Overhead Rate and Capacity

 

1) When the fixed costs of capacity are spread over the estimated activity of the period rather than the level of activity at capacity, the units that are produced must shoulder the costs of unused capacity.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

2) When the predetermined overhead rate is based on the level of activity at capacity, an item called the Cost of Unused Capacity may appear to be treated as a period expense on income statements prepared for internal management use.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

3) If the predetermined overhead rate is based on the estimated level of activity for the current period, then products will be charged only for the capacity that they use and will not be charged for the capacity they don’t use.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

4) Risser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 14,256  
Capacity of the jointer   240  hours
Actual results:      
Sales $ 62,310  
Direct materials $ 14,100  
Direct labor $ 16,000  
Actual total fixed manufacturing overhead $ 14,256  
Selling and administrative expense $ 8,900  
Actual hours of jointer use   220  hours

 

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

  1. A) $10,242
  2. B) $19,142
  3. C) $17,954
  4. D) $62,310

 

Answer:  B

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $14,256 ÷ 240 hours = $59.40 per hour

 

Sales     $ 62,310
Cost of Goods Sold:        
Direct materials $ 14,100    
Direct labor   16,000    
Manufacturing overhead applied 260 hours × $59.40 per hour   13,068   43,168
Gross margin     $ 19,142

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

5) The management of Garn Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated activity for the coming year. The Corporation’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated activity for the upcoming year is 69,000 machine-hours. Capacity is 85,000 machine-hours. All of the manufacturing overhead is fixed and is $4,105,500 per year within the range of 69,000 to 85,000 machine-hours. If the Corporation bases its predetermined overhead rate on capacity but the actual level of activity for the year turns out to be 69,700 machine-hours, the cost of unused capacity shown on the income statement prepared for internal management purposes would be closest to:

  1. A) $772,800
  2. B) $780,640
  3. C) $738,990
  4. D) $41,650

 

Answer:  C

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $4,105,500 ÷ 85,000 machine-hours = $48.30 per machine-hour

 

Actual manufacturing overhead cost incurred $ 4,105,500  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 48.30  per machine-hour
Actual hours   69,700  machine-hours
Manufacturing overhead applied to jobs $ 3,366,510  
Cost of unused capacity $ 738,990  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

6) The management of Krach Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 10,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 9,500 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $12,000 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

  1. A) $2,000
  2. B) $2,500
  3. C) $1,900
  4. D) $600

 

Answer:  B

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $12,000 ÷ 12,000 machine-hours = $1.00 per machine-hour

 

Actual manufacturing overhead cost incurred $ 12,000  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 1.00  per machine-hour
Actual hours   9,500  machine-hours
Manufacturing overhead applied to jobs $ 9,500  
Cost of unused capacity $ 2,500  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

7) The management of Winterroth Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The Corporation’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours.

 

  Estimated at the Beginning of the Year Capacity Actual  
Machine-hours   53,000     63,000   49,000
Manufacturing overhead $ 1,803,060   $ 1,803,060 $ 1,803,060

 

If the Corporation bases its predetermined overhead rate on capacity, then as shown on the income statement prepared for internal management purposes, the cost of unused capacity would be closest to:

  1. A) $286,200
  2. B) $400,680
  3. C) $264,600
  4. D) $136,080

 

Answer:  B

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $1,803,060 ÷ 63,000 machine-hours = $28.62 per machine-hour

 

  $ 1,803,06  
Actual manufacturing overhead cost incurred   0  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 28.62  per machine-hour
Actual hours   49,000  machine-hours
Manufacturing overhead applied to jobs   1,402,380  
Cost of unused capacity $ 400,680  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

8) Dowty Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 19,964  
Capacity of the lathe   280  hours
Actual results:      
Actual total fixed manufacturing overhead $ 19,964  
Actual hours of lathe use   230  hours

 

The manufacturing overhead applied is closest to:

  1. A) $19,964
  2. B) $16,399
  3. C) $7,639
  4. D) $9,300

 

Answer:  B

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $19,964 ÷ 280 hours = $71.30 per hour

 

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 230 hours × $71.30 per hour = $16,399

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

9) Rapier Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 3,740  
Capacity of the jointer   200  hours
Actual results:      
Actual total fixed manufacturing overhead $ 3,740  
Actual hours of jointer use   170  hours

 

The predetermined overhead rate based on hours at capacity is closest to:

  1. A) $58.24 per hour
  2. B) $49.50 per hour
  3. C) $22.00 per hour
  4. D) $18.70 per hour

 

Answer:  D

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $3,740 ÷ 200 hours = $18.70 per hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

10) Traeger Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated bandsaw. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 26,936  
Capacity of the bandsaw   280  hours
Actual results:      
Actual total fixed manufacturing overhead $ 26,936  
Actual hours of bandsaw use   260  hours

 

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

  1. A) $1,924
  2. B) $18,136
  3. C) $0
  4. D) $18,765

 

Answer:  A

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $26,936 ÷ 280 hours = $96.20 per hour

 

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (280 hours − 260 hours) × $96.20 per hour = $1,924

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

11) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 11,648  
Capacity of the jointer   280  hours
Actual results:      
Sales $ 52,760  
Direct materials $ 13,300  
Direct labor $ 16,000  
Actual total fixed manufacturing overhead $ 11,648  
Selling and administrative expense $ 9,300  
Actual hours of jointer use   260  hours

 

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

  1. A) $0
  2. B) $2,348
  3. C) $832
  4. D) $3,012

 

Answer:  C

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $11,648 ÷ 280 hours = $41.60 per hour

 

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (280 hours − 260 hours) × $41.60 per hour = $832

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

12) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 11,648  
Capacity of the jointer   280  hours
Actual results:      
Sales $ 52,760  
Direct materials $ 13,300  
Direct labor $ 16,000  
Actual total fixed manufacturing overhead $ 11,648  
Selling and administrative expense $ 9,300  
Actual hours of jointer use   260  hours

 

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

  1. A) $52,760
  2. B) $3,344
  3. C) $12,644
  4. D) $11,812

 

Answer:  C

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $11,648 ÷ 280 hours = $41.60 per hour

 

Sales     $ 52,760
Cost of Goods Sold:        
Direct materials $ 13,300    
Direct labor   16,000    
Manufacturing overhead applied 260 hours × $41.60 per hour   10,816   40,116
Gross margin     $ 12,644

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

13) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 33,075  
Capacity of the shaper   270  hours
Actual results:      
Sales $ 79,268  
Direct materials $ 12,200  
Direct labor $ 17,400  
Actual total fixed manufacturing overhead $ 33,075  
Selling and administrative expense $ 8,100  
Actual hours of shaper use   250  hours

 

The predetermined overhead rate based on hours at capacity is closest to:

 

  1. A) $30.00 per hour
  2. B) $122.50 per hour
  3. C) $32.40 per hour
  4. D) $132.30 per hour

 

Answer:  B

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $33,075 ÷ 270 hours = $122.50 per hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

14) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 33,075  
Capacity of the shaper   270  hours
Actual results:      
Sales $ 79,268  
Direct materials $ 12,200  
Direct labor $ 17,400  
Actual total fixed manufacturing overhead $ 33,075  
Selling and administrative expense $ 8,100  
Actual hours of shaper use   250  hours

 

The manufacturing overhead applied is closest to:

  1. A) $7,500
  2. B) $33,075
  3. C) $8,100
  4. D) $30,625

 

Answer:  D

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $33,075 ÷ 270 hours = $122.50 per hour

 

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 250 hours × $122.50 per hour = $30,625

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

15) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 33,075  
Capacity of the shaper   270  hours
Actual results:      
Sales $ 79,268  
Direct materials $ 12,200  
Direct labor $ 17,400  
Actual total fixed manufacturing overhead $ 33,075  
Selling and administrative expense $ 8,100  
Actual hours of shaper use   250  hours

 

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

  1. A) $2,450
  2. B) $0
  3. C) $24,975
  4. D) $25,575

 

Answer:  A

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $33,075 ÷ 270 hours = $122.50 per hour

 

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (270 hours − 250 hours) × $122.50 per hour = $2,450

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

16) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 33,075  
Capacity of the shaper   270  hours
Actual results:      
Sales $ 79,268  
Direct materials $ 12,200  
Direct labor $ 17,400  
Actual total fixed manufacturing overhead $ 33,075  
Selling and administrative expense $ 8,100  
Actual hours of shaper use   250  hours

 

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

  1. A) $19,043
  2. B) $16,593
  3. C) $10,943
  4. D) $79,268

 

Answer:  A

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $33,075 ÷ 270 hours = $122.50 per hour

 

Sales     $ 79,268
Cost of Goods Sold:        
Direct materials $ 12,200    
Direct labor   17,400    
Manufacturing overhead applied 250 hours × $122.50 per hour   30,625   60,225
Gross margin     $ 19,043

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

17) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated router. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 10,998  
Capacity of the router   180  hours
Actual results:      
Actual total fixed manufacturing overhead $ 10,998  
Actual hours of router use   130  hours

 

The predetermined overhead rate based on hours at capacity is closest to:

  1. A) $84.60 per hour
  2. B) $61.10 per hour
  3. C) $61.54 per hour
  4. D) $44.44 per hour

 

Answer:  B

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $10,998 ÷ 180 hours = $61.10 per hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

18) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated router. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 10,998  
Capacity of the router   180  hours
Actual results:      
Actual total fixed manufacturing overhead $ 10,998  
Actual hours of router use   130  hours

 

The manufacturing overhead applied is closest to:

  1. A) $7,943
  2. B) $8,000
  3. C) $5,778
  4. D) $10,998

 

Answer:  A

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $10,998 ÷ 180 hours = $61.10 per hour

 

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 130 hours × $61.10 per hour = $7,943

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

19) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the predetermined overhead rate is closest to:

  1. A) $1.32 per machine-hour
  2. B) $1.49 per machine-hour
  3. C) $0.99 per machine-hour
  4. D) $1.54 per machine-hour

 

Answer:  A

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base

= $11,880 ÷ 9,000 machine-hours = $1.32 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

20) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

  1. A) $1.54 per machine-hour
  2. B) $1.32 per machine-hour
  3. C) $1.49 per machine-hour
  4. D) $0.99 per machine-hour

 

Answer:  D

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $11,880 ÷ 12,000 machine-hours = $0.99 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

21) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

  1. A) $2,970
  2. B) $2,541
  3. C) $1,716
  4. D) $4,257

 

Answer:  D

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $11,880 ÷ 12,000 machine-hours = $0.99 per machine-hour

 

Actual manufacturing overhead cost incurred $ 11,880  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 0.99  per machine-hour
Actual hours   7,700  machine-hours
Manufacturing overhead applied to jobs $ 7,623  
Cost of unused capacity $ 4,257  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

22) Zackery Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 7,452  
Capacity of the lathe   230  hours
Actual results:      
Actual total fixed manufacturing overhead $ 7,452  
Actual hours of lathe use   180  hours

 

The manufacturing overhead applied is closest to:

  1. A) $9,900
  2. B) $5,832
  3. C) $7,748
  4. D) $7,452

 

Answer:  B

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $7,452 ÷ 230 hours = $32.40 per hour

 

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 180 hours × $32.40 per hour = $5,832

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

23) Zackery Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 

Estimates at the beginning of the month:      
Estimated total fixed manufacturing overhead $ 7,452  
Capacity of the lathe   230  hours
Actual results:      
Actual total fixed manufacturing overhead $ 7,452  
Actual hours of lathe use   180  hours

 

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

  1. A) $2,448
  2. B) $296
  3. C) $0
  4. D) $1,620

 

Answer:  D

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = $7,452 ÷ 230 hours = $32.40 per hour

 

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (230 hours − 180 hours) × $32.40 per hour = $1,620

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

24) The management of Holdaway Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 79,000 machine-hours. Capacity is 88,000 machine-hours and the actual level of activity for the year is assumed to be 74,900 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $5,700,640 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

  1. A) $72.16 per machine-hour
  2. B) $70.38 per machine-hour
  3. C) $76.11 per machine-hour
  4. D) $64.78 per machine-hour

 

Answer:  D

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $5,700,640 ÷ 88,000 machine-hours = $64.78 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

25) The management of Holdaway Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 79,000 machine-hours. Capacity is 88,000 machine-hours and the actual level of activity for the year is assumed to be 74,900 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $5,700,640 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

 

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

  1. A) $295,856
  2. B) $848,618
  3. C) $583,020
  4. D) $552,762

 

Answer:  B

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $5,700,640 ÷ 88,000 machine-hours = $64.78 per machine-hour

 

Actual manufacturing overhead cost incurred $ 5,700,640  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 64.78  per machine-hour
Actual hours   74,900  machine-hours
Manufacturing overhead applied to jobs $ 4,852,022  
Cost of unused capacity $ 848,618  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

26) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

  1. A) $48.08 per machine-hour
  2. B) $37.82 per machine-hour
  3. C) $48.91 per machine-hour
  4. D) $45.75 per machine-hour

 

Answer:  B

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $2,836,500 ÷ 75,000 machine-hours = $37.82 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

27) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, then the amount of manufacturing overhead charged to job Z77W is closest to:

  1. A) $15,506.20
  2. B) $19,065.00
  3. C) $20,051.12
  4. D) $19,711.27

 

Answer:  A

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $2,836,500 ÷ 75,000 machine-hours = $37.82 per machine-hour

 

Manufacturing overhead applied to Job Z77W      
Number of hours for the job   410  machine-hours
Predetermined overhead rate $ 37.82  per machine-hour
Manufacturing overhead applied to the job $ 15,506.20  

 

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement

 

 

28) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

  1. A) $137,250
  2. B) $605,120
  3. C) $491,660
  4. D) $467,870

 

Answer:  B

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $2,836,500 ÷ 75,000 machine-hours = $37.82 per machine-hour

 

Actual manufacturing overhead cost incurred $ 2,836,500  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 37.82  per machine-hour
Actual hours   59,000  machine-hours
Manufacturing overhead applied to jobs $ 2,231,380  
Cost of unused capacity $ 605,120  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

29) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

 

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the predetermined overhead rate is closest to:

  1. A) $57.05 per machine-hour
  2. B) $60.83 per machine-hour
  3. C) $59.86 per machine-hour
  4. D) $50.37 per machine-hour

 

Answer:  C

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = $4,130,340 ÷ 69,000 machine-hours = $59.86 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

30) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

 

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the amount of manufacturing overhead charged to Job Q20L is closest to:

  1. A) $23,673.90
  2. B) $26,812.98
  3. C) $28,589.98
  4. D) $28,134.20

 

Answer:  D

Explanation:  Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = $59.86 per machine-hour × 470 machine-hours = $28,134.20

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

31) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

  1. A) $57.05 per machine-hour
  2. B) $59.86 per machine-hour
  3. C) $50.37 per machine-hour
  4. D) $60.83 per machine-hour

 

Answer:  C

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $4,130,340 ÷ 82,000 machine-hours = $50.37 per machine-hour

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

32) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, then the amount of manufacturing overhead charged to Job Q20L is closest to:

  1. A) $28,589.98
  2. B) $26,592.60
  3. C) $26,812.98
  4. D) $23,673.90

 

Answer:  D

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $4,130,340 ÷ 82,000 machine-hours = $50.37 per machine-hour

 

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = $50.37 per machine-hour × 470 machine-hours = $23,673.90

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  FN Measurement

 

 

 

33) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

 

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

  1. A) $654,810
  2. B) $687,076
  3. C) $547,669
  4. D) $483,552

 

Answer:  D

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $4,130,340 ÷ 82,000 machine-hours = $50.37 per machine-hour

 

Actual manufacturing overhead cost incurred $ 4,130,340  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 50.37  per machine-hour
Actual hours   72,400  machine-hours
Manufacturing overhead applied to jobs $ 3,646,788  
Cost of unused capacity $ 483,552  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

34) The management of Kotek Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 8,000 machine-hours. In addition, capacity is 10,000 machine-hours and the actual activity for the year is 8,700 machine-hours. All of the manufacturing overhead is fixed and is $6,400 per year. Job L77S, which required 220 machine-hours, is one of the jobs worked on during the year.

 

Required:

 

  1. Determine the predetermined overhead rate if the predetermined overhead rate is based on activity at capacity.
  2. Determine how much overhead would be applied to Job L77S if the predetermined overhead rate is based on activity at capacity.
  3. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

 

Answer:  a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $6,400 ÷ 10,000 MHs = $0.64 per MH

 

  1. Manufacturing overhead applied to Job L77S

 

Number of hours for the job   220  MHs
Predetermined overhead rate   0.64  per MH
Manufacturing overhead applied to the job $ 140.80  

 

c.

Actual manufacturing overhead cost incurred $ 6,400  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 0.64  per MH
Actual hours   8,700  MHs
Manufacturing overhead applied to jobs $ 5,568  
Cost of unused capacity $ 832  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

35) The management of Schneiter Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 42,000 machine-hours. In addition, capacity is 46,000 machine-hours and the actual activity for the year is 43,000 machine-hours. All of the manufacturing overhead is fixed and is $734,160 per year.

 

Required:

 

  1. Determine the predetermined overhead rate if the predetermined overhead rate is based on activity at capacity.
  2. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

 

Answer:  a.

Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $734,160 ÷ 46,000 MHs = $15.96 per MH

 

b.

Actual manufacturing overhead cost incurred $ 734,160  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 15.96  per MH
Actual hours   43,000  MHs
Manufacturing overhead applied to jobs $ 686,280  
Cost of unused capacity $ 47,880  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

36) The management of Bouyer Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 34,000 machine-hours. In addition, capacity is 37,000 machine-hours and the actual activity for the year is 34,700 machine-hours. All of the manufacturing overhead is fixed and is $377,400 per year.

 

Required:

 

Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

 

Answer:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $377,400 ÷ 37,000 MHs = $10.20 per MH

 

Actual manufacturing overhead cost incurred $ 377,400  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 10.20  per MH
Actual hours   34,700  MHs
Manufacturing overhead applied to jobs $ 353,940  
Cost of unused capacity $ 23,460  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

 

37) The management of Buelow Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work.

 

Estimated activity for the upcoming year   76,000  machine-hours
Capacity   94,000  machine-hours
Actual activity for the year   82,800  machine-hours
Manufacturing overhead (all fixed) $ 5,572,320  per year

 

Job Q58A, which required 130 machine-hours, is one of the jobs worked on during the year.

 

Required:

 

  1. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated activity for the upcoming year.
  2. Determine how much overhead would be applied to Job Q58A if the predetermined overhead rate is based on estimated activity for the upcoming year.
  3. Determine the predetermined overhead rate if the predetermined overhead rate is based on the activity at capacity.
  4. Determine how much overhead would be applied to Job Q58A if the predetermined overhead rate is based on activity at capacity.
  5. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

 

Answer:

a.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $5,572,320 ÷ 76,000 MHs = $73.32 per MH

 

b.

Manufacturing overhead applied to Job Q58A      
Number of hours for the job   120  MHs
Predetermined overhead rate $ 73.32  per MH
Manufacturing overhead applied to the job $ 9,531.60  

 

c.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $5,572,320 ÷ 94,000 MHs = $59.28 per MH

 

d.

Manufacturing overhead applied to Job Q58A      
Number of hours for the job   130  MHs
Predetermined overhead rate $ 59.28  per MH
Manufacturing overhead applied to the job $ 7,706.40  

 

e.

Actual manufacturing overhead cost incurred $ 5,572,320  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 59.28  per MH
Actual hours   82,800  MHs
Manufacturing overhead applied to jobs $ 4,908,384  
Cost of unused capacity $ 663,936  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

38) The management of Wrights Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work.

 

Estimated activity for the upcoming year   15,000 machine-hours
Capacity   18,000 machine-hours
Actual activity for the year   15,800 machine-hours
Manufacturing overhead (all fixed) $ 43,200 per year

 

Required:

 

  1. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated activity for the upcoming year.

 

  1. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

 

Answer:

a.

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = $43,200 ÷ 15,000 MHs = $2.88 per MH

 

b.

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = $43,200 ÷ 18,000 MHs = $2.40 per MH

 

Actual manufacturing overhead cost incurred $ 43,200  
Manufacturing overhead applied to jobs:      
Predetermined overhead rate $ 2.40  per MH
Actual hours   15,800  MHs
Manufacturing overhead applied to jobs $ 37,920  
Cost of unused capacity $ 5,280  

 

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

Managerial Accounting, 16e (Garrison)

Appendix 5A  Analyzing Mixed Costs

 

1) The engineering approach to the analysis of mixed costs involves a detailed statistical analysis of cost behavior using methods that minimize the squared errors.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

2) A major advantage of the high-low method of cost estimation is that it omits all data from the analysis other than the lowest and highest costs.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

3) The highest and lowest costs are always used to analyze a mixed cost under the high-low method.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

4) The high and low points used in the high-low method tend to be unusual and therefore the cost formula for the mixed cost may not accurately represent all of the data.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

5) In a scattergraph of cost and activity, activity is the independent variable because it causes variations in the cost.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

6) Managers can use a variety of methods to estimate the fixed and variable components of a mixed cost. In account analysis, an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

7) The least-squares regression method computes the regression line that minimizes the sum of the squared deviations from the plotted points to the line.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

8) The R2 (i.e., R-squared) tells us the percentage of the variation in the dependent variable (cost) that is explained by variation in the independent variable (activity).

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

9) The R2 (i.e., R-squared) varies from 0% to 100%, and the lower the percentage, the better the fit of the data to a straight line.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

10) A quick look at a scattergraph of cost versus activity can reveal that there is little relation between the cost and the activity or that the relation is something other than a simple straight line. In such cases, least square regression is highly recommended for estimating fixed and variable costs.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

11) Least-squares regression selects the values for the intercept and slope of a straight line that minimize the sum of the errors.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

12) Which of the following statements is true when referring to the high-low method of cost analysis?

  1. A) The high-low method has no major weaknesses.
  2. B) The high-low method is very hard to apply.
  3. C) In essence, the high-low method draws a straight line through two data points.
  4. D) The high-low method uses all of the available data to estimate fixed and variable costs.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

13) In describing the cost formula equation, Y = a + bX, which of the following is correct:

  1. A) “Y” is the independent variable.
  2. B) “a” is the variable cost per unit.
  3. C) “a” and “b” are valid for all levels of activity.
  4. D) in the high-low method, “b” equals the change in cost divided by the change in activity.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

14) Larker Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $4 per machine-hour. Total electrical power cost at the high level of activity was $19,200 and at the low level of activity was $18,400. If the high level of activity was 3,300 machine hours, then the low level of activity was:

  1. A) 3,100 machine hours
  2. B) 3,200 machine hours
  3. C) 3,000 machine hours
  4. D) 2,900 machine hours

 

Answer:  A

Explanation:  Total cost = Total fixed cost + Total variable cost

 

High level of activity:

$19,200 = Total fixed cost + ($4 per machine-hour × 3,300 machine hours)

Total fixed cost = $19,200 − $13,200 = $6,000

 

Low level of activity:

$18,400 = $6,000 + ($4 per machine-hour × Low level of activity)

$4 per machine-hour × Low level of activity = $18,400 − $6,000 = $12,400

 

Low level of activity = 3,100 machine hours.

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

15) Gamach Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $104.50 per unit.

 

Sales volume (units)   5,000     6,000
Cost of sales $ 295,000   $ 354,000
Selling and administrative costs $ 186,000   $ 202,800

 

The best estimate of the total monthly fixed cost is:

  1. A) $102,000
  2. B) $518,900
  3. C) $556,800
  4. D) $481,000

 

Answer:  A

Explanation:  Fixed cost of sales:

     
Total cost at 6,000 units $ 354,000
Less variable cost element: 6,000 units × $59.00 per unit   354,000
Fixed cost $ 0

 

Variable selling and administrative cost per unit = Change in cost ÷ Change in activity

 

= ($202,800 – $186,000) ÷ (6,000 units – 5,000 units)

= $16,800 ÷ 1,000 units

= $16.80 per unit

 

Fixed cost of sales:

     
Total cost at 6,000 units $ 202,800
Less variable cost element: 6,000 units × $16.80 per unit   100,800
Fixed cost $ 102,000

 

Total fixed cost = $0 + $102,000 = $102,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

16) Hara Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $159.80 per unit.

 

Sales volume (units)   6,000     7,000
Cost of sales $ 363,600   $ 424,200
Selling and administrative costs $ 531,000   $ 547,400

 

The best estimate of the total variable cost per unit is:

  1. A) $77.00
  2. B) $60.60
  3. C) $149.10
  4. D) $138.80

 

Answer:  A

Explanation:  Variable cost of sales = Change in cost ÷ Change in activity

 

= ($424,200 – $363,600) ÷ (7,000 units – 6,000 units)

= $60,600 ÷ 1,000 units

= $60.60 per unit

 

Variable selling and administrative cost = Change in cost ÷ Change in activity

 

= ($547,400 – $531,000) ÷ (7,000 units – 6,000 units)

= $16,400 ÷ 1,000 units

= $16.40 per unit

 

Total variable cost = Variable cost of sales + Variable selling and administrative cost

 

= $60.60 per unit + $16.40 per unit

= $77.00 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

17) Maintenance costs at a Straiton Corporation factory are listed below:

 

  Machine-

Hours

  Maintenance Cost  
March 3,627     $ 54,384
April 3,588     $ 53,980
May 3,637     $ 54,453
June 3,638     $ 54,491
July 3,572     $ 53,843
August 3,611     $ 54,196
September 3,644     $ 54,550
October 3,609     $ 54,181
November 3,669     $ 54,767

 

Management believes that maintenance cost is a mixed cost that depends on machine-hours. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first and round off to the nearest whole cent. Compute the fixed component second and round off to the nearest whole dollar. These estimates would be closest to:

  1. A) $0.10 per machine-hour; $54,382 per month
  2. B) $15.00 per machine-hour; $54,316 per month
  3. C) $9.12 per machine-hour; $21,309 per month
  4. D) $9.53 per machine-hour; $19,801 per month

 

Answer:  D

Explanation:

  Machine-

Hours

  Maintenance Cost
High level of activity (November) 3,669     $ 54,767
Low level of activity (July) 3,572       53,843
Change 97     $ 924

 

Variable cost per unit = Change in cost ÷ Change in activity

= $924 ÷ 97 machine-hours

= $9.53 per machine-hour

 

Fixed cost = Total cost – Variable cost element

= $54,767 − ($9.53 per machine-hour × 3,669 machine-hours)

= $54,767 − $34,966

= $19,801

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

18) Iacob Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $103.40 per unit.

 

Sales volume (units)   5,000     6,000
Cost of sales $ 315,500   $ 378,600
Selling and administrative costs $ 162,500   $ 177,600

 

The best estimate of the total contribution margin when 5,300 units are sold is:

  1. A) $56,710
  2. B) $133,560
  3. C) $41,340
  4. D) $213,590

 

Answer:  B

Explanation:  Used the high-low method to estimate variable components of the costs:

 

Variable cost of sales = Change in cost ÷ Change in activity

= ($378,600 – $315,500) ÷ (6,000 units – 5,000 units)

= $63,100 ÷ 1,000 units

= $63.10 per unit

 

Variable selling and administrative cost = Change in cost ÷ Change in activity

= ($177,600 – $162,500) ÷ (6,000 units – 5,000 units)

= $15,100 ÷ 1,000 units

= $15.10 per unit

 

Total variable cost per unit = Variable cost of sales + Variable selling and administrative cost

= $63.10 per unit + $15.10 per unit = $78.20 per unit

 

Contribution margin per unit = Selling price per unit – Total variable cost per unit

= $103.40 per unit – $78.20 per unit = $25.20 per unit

Total contribution margin = Contribution margin per unit × Total unit sales

= $25.20 per unit × 5,300 units = $133,560

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

19) Edal Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

             
Production volume   5,000 units   6,000 units
Direct materials $ 266,500   $ 319,800  
Direct labor $ 52,000   $ 62,400  
Manufacturing overhead $ 748,500   $ 769,200  

 

The best estimate of the total variable manufacturing cost per unit is:

  1. A) $63.70
  2. B) $84.40
  3. C) $53.30
  4. D) $20.70

 

Answer:  B

Explanation:  Direct materials cost per unit = Change in cost ÷ Change in activity

= ($319,800 – $266,500) ÷ (6,000 units – 5,000 units)

= $53,300 ÷ 1,000 units

= $53.30 per unit

 

Direct labor cost per unit = Change in cost ÷ Change in activity

= ($62,400 – $52,000) ÷ (6,000 units – 5,000 units)

= $10,400 ÷ 1,000 units

= $10.40 per unit

 

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= ($769,200 – $748,500) ÷ (6,000 units – 5,000 units)

= $20,700 ÷ 1,000 units

= $20.70 per unit

 

Total variable manufacturing cost per unit = Direct materials per unit + Direct labor per unit + Variable manufacturing overhead per unit = $53.30 per unit + $10.40 per unit + $20.70 per unit = $84.40 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

20) Bakan Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   3,000 units   4,000 units
Direct materials $ 86.30 per unit $ 86.30 per unit
Direct labor $ 26.40 per unit $ 26.40 per unit
Manufacturing overhead $ 75.90 per unit $ 60.40 per unit

 

The best estimate of the total variable manufacturing cost per unit is:

  1. A) $126.60
  2. B) $86.30
  3. C) $13.90
  4. D) $112.70

 

Answer:  A

Explanation:  Total manufacturing overhead at 4,000 units = 4,000 units × $60.40 per unit = $241,600

 

Total manufacturing overhead at 3,000 units = 3,000 units × $75.90 per unit = $227,700

 

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= ($241,600 – $227,700) ÷ (4,000 units – 3,000 units)

= $13,900 ÷ 1,000 units

= $13.90 per unit

 

Total variable manufacturing cost = Direct materials + Direct labor + Variable manufacturing overhead

= $86.30 per unit + $26.40 per unit + $13.90 per unit

= $126.60 per unit

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

21) Supply costs at Coulthard Corporation’s chain of gyms are listed below:

 

  Client-

Visits

  Supply Cost  
March 12,855     $ 23,598
April 12,283     $ 23,278
May 13,104     $ 23,742
June 12,850     $ 23,607
July 12,493     $ 23,415
August 12,794     $ 23,562
September 12,686     $ 23,496
October 12,765     $ 23,541
November 13,018     $ 23,687

 

Management believes that supply cost is a mixed cost that depends on client-visits. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, rounding off to the nearest whole cent. Then compute the fixed component, rounding off to the nearest whole dollar. Those estimates are closest to:

  1. A) $1.85 per client-visit; $23,547 per month
  2. B) $1.77 per client-visit; $557 per month
  3. C) $0.55 per client-visit; $16,579 per month
  4. D) $0.57 per client-visit; $16,273 per month

 

Answer:  D

Explanation:

  Client-

Visits

  Supply Cost  
High level of activity (May) 13,104     $ 23,742
Low level of activity (April) 12,283       23,278
Change 821     $ 464

 

Variable cost per unit = Change in cost ÷ Change in activity

= $464 ÷ 821 client-visits

= $0.57 per client-visit

 

Fixed cost = Total cost – Variable cost element

= $23,742 – ($0.57 per client-visit × 13,104 client-visits)

= $23,742 – $7,469

= $16,273

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

22) Electrical costs at one of Finfrock Corporation’s factories are listed below:

 

  Machine-

Hours

  Electrical Cost  
March 3,642     $ 40,537
April 3,616     $ 40,319
May 3,667     $ 40,706
June 3,634     $ 40,462
July 3,665     $ 40,703
August 3,659     $ 40,680
September 3,644     $ 40,547
October 3,612     $ 40,268
November 3,624     $ 40,364

 

Management believes that electrical cost is a mixed cost that depends on machine-hours. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, rounding off to the nearest whole cent. Then compute the fixed component, rounding off to the nearest whole dollar. Those estimates are closest to:

  1. A) $7.96 per machine-hour; $11,517 per month
  2. B) $11.13 per machine-hour; $40,510 per month
  3. C) $9.61 per machine-hour; $5,533 per month
  4. D) $0.13 per machine-hour; $40,246 per month

 

Answer:  A

Explanation:

  Machine-

Hours

  Electrical Cost  
High level of activity (May) 3,667     $ 40,706
Low level of activity (October) 3,612       40,268
Change 55     $ 438

 

Variable cost per unit = Change in cost ÷ Change in activity

= $438 ÷ 55 machine-hours

= $7.96 per machine-hour

 

Fixed cost = Total cost – Variable cost element

= $40,706 – ($7.96 per machine-hour × 3,667 machine-hours)

= $40,706 – $29,189

= $11,517

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

23) Deidoro Company has provided the following data for maintenance cost:

 

  Prior Year   Current Year
Machine hours   8,000     10,000
Maintenance cost $ 26,600   $ 31,000

 

Maintenance cost is a mixed cost with variable and fixed components. The fixed and variable components of maintenance cost are closest to:

  1. A) $26,600 per year; $3.10 per machine hour
  2. B) $9,000 per year; $2.20 per machine hour
  3. C) $9,000 per year; $3.10 per machine hour
  4. D) $26,600 per year; $2.20 per machine hour

 

Answer:  B

Explanation:

  Machine-

Hours

  Maintenance Cost  
High level of activity 10,000     $ 31,000
Low level of activity 8,000       26,600
Change 2,000     $ 4,400

 

Variable cost per unit = Change in cost ÷ Change in activity

= $4,400 ÷ 2,000 machine-hours

= $2.20 per machine-hour

 

Fixed cost = Total cost − Variable cost element

= $31,000 − ($2.20 per machine-hour × 10,000 machine-hours)

= $31,000 − $22,000

= $9,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

24) Caraco Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   7,000 units   8,000 units
Direct materials $ 87.40 per unit $ 87.40 per unit
Direct labor $ 20.20 per unit $ 20.20 per unit
Manufacturing overhead $ 101.50 per unit $ 90.80 per unit

 

The best estimate of the total cost to manufacture 7,300 units is closest to:

  1. A) $1,487,375
  2. B) $1,448,320
  3. C) $1,500,750
  4. D) $1,526,430

 

Answer:  C

Explanation:  Total manufacturing overhead at 8,000 units = 8,000 units × $90.80 per unit = $726,400

 

Total manufacturing overhead at 7,000 units = 7,000 units × $101.50 per unit = $710,500

 

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= ($726,400 – $710,500) ÷ (8,000 units – 7,000 units)

= $15,900 ÷ 1,000 units

= $15.90 per unit

 

Fixed cost element of manufacturing overhead = Total cost – Variable cost element

= $726,400 – (8,000 units × $15.90 per unit)

= $726,400 – $127,200

= $599,200

 

Total variable manufacturing cost = Direct materials + Direct labor + Manufacturing overhead

= ($87.40 per unit + $20.20 per unit) + $15.90 per unit

= $123.50 per unit

 

Total manufacturing cost = Total variable manufacturing cost per unit × Total units manufactured + Total fixed manufacturing cost

= ($123.50 per unit × 7,300 units) + $599,200

= $901,550 + $599,200

= $1,500,700

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

25) A soft drink bottler incurred the following factory utility cost: $9,246 for 5,200 cases bottled and $8,997 for 4,900 cases bottled. Factory utility cost is a mixed cost containing both fixed and variable components. The variable factory utility cost per case bottled is closest to:

  1. A) $1.81
  2. B) $1.78
  3. C) $1.84
  4. D) $0.83

 

Answer:  D

Explanation:

  Units   Utility Cost  
High level of activity 5,200   $ 9,246
Low level of activity 4,900     8,997
Change 300   $ 249

 

Variable cost per unit = Change in cost ÷ Change in activity

= $249 ÷ 300 units

= $0.83 per unit

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

26) Andom Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   1,000 units   2,000 units
Direct materials $ 15.20 per unit $ 15.20 per unit
Direct labor $ 30.50 per unit $ 30.50 per unit
Manufacturing overhead $ 54.10 per unit $ 37.40 per unit

 

The best estimate of the total monthly fixed manufacturing cost is:

  1. A) $74,800
  2. B) $54,100
  3. C) $99,800
  4. D) $33,400

 

Answer:  D

Explanation:  Both direct materials and direct labor are variable costs.

Total manufacturing overhead at 1,000 units = $54.10 per unit × 1,000 units = $54,100

Total manufacturing overhead at 2,000 units = $37.40 per unit × 2,000 units = $74,800

 

Variable element of manufacturing overhead = Change in cost ÷ Change in activity

= ($74,800 – $54,100) ÷ (2,000 units – 1,000 units)

= $20,700 ÷ 1,000 units

= $20.70 per unit

 

Fixed cost element of manufacturing overhead = Total cost – Total variable cost

= $74,800 – ($20.70 per unit × 2,000 units)

= $74,800 – $41,400

= $33,400

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

27) The following data pertains to activity and maintenance cost for two recent periods:

 

Activity level (units)   8,000     7,000
Maintenance cost $ 34,000   $ 31,500

 

Maintenance cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for maintenance cost is:

  1. A) Y = $4.25 X
  2. B) Y = $14,000 + $2.50 X
  3. C) Y = $2,500 + $4.25 X
  4. D) Y = $4.50 X

 

Answer:  B

Explanation:

  Units   Maintenance Cost
High level of activity 8,000   $ 34,000
Low level of activity 7,000     31,500
Change 1,000   $ 2,500

 

Variable cost per unit = Change in cost ÷ Change in activity

= $2,500 ÷ 1,000 units

= $2.50 per unit

 

Fixed cost = Total cost − Variable cost element

= $34,000 − ($2.50 per unit × 8,000 units)

= $34,000 − $20,000

= $14,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

28) Farac Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   4,000 units   5,000 units
Direct materials $ 208,800   $ 261,000  
Direct labor $ 119,200   $ 149,000  
Manufacturing overhead $ 319,200   $ 329,500  

 

The best estimate of the total cost to manufacture 4,300 units is closest to:

  1. A) $674,890
  2. B) $665,855
  3. C) $695,740
  4. D) $635,970

 

Answer:  A

Explanation:  Direct materials is a variable cost, so it can be computed as follows:

Direct materials cost per unit = $208,800 / 4,000 units = $52.20 per unit

Direct labor could also be computed the same way, but just to make sure it is purely a variable cost, we’ll use the high-low method:

 

Variable direct labor cost per unit = Change in cost ÷ Change in activity

= ($149,000 – $119,200) ÷ (5,000 units – 4,000 units)

= $29,800 ÷ 1,000 units

= $29.80 per unit

 

Direct labor fixed cost element = Total cost – Variable cost element

= $149,000 – ($29.80 per unit × 5,000 units)

= $149,000 – $149,000 = $0

 

Variable manufacturing overhead cost per unit = Change in cost ÷ Change in activity

= ($329,500 – $319,200) ÷ (5,000 units – 4,000 units)

= $10,300 ÷ 1,000 units

= $10.30 per unit

 

Manufacturing overhead fixed cost element = Total cost – Variable cost element

= $329,500 – ($10.30 per unit × 5,000 units)

= $329,500 – $51,500 = $278,000

 

Total variable cost = Direct materials + Direct labor + Variable manufacturing overhead

= $52.20 per unit + $29.80 per unit + $10.30 per unit

= $92.30 per unit

Total fixed overhead cost = $278,000

 

Total cost to manufacture 4,300 units = Total fixed cost + Total variable cost

= $278,000 + ($92.30 per unit × 4,300 units)

= $278,000 + $396,890

= $674,890

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

29) The following data pertains to activity and utility cost for two recent periods:

 

Activity level (units)   15,000     12,000
Utility cost $ 24,750   $ 21,000

 

Utility cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for utility cost is:

  1. A) Y = $1.65 X
  2. B) Y = $1.75 X
  3. C) Y = $3,750 + $1.75 X
  4. D) Y = $6,000 + $1.25 X

 

Answer:  D

Explanation:

  Units   Utility Cost
High level of activity 15,000   $ 24,750
Low level of activity 12,000     21,000
Change 3,000   $ 3,750

 

Variable cost per unit = Change in cost ÷ Change in activity

= $3,750 ÷ 3,000 units

= $1.25 per unit

 

Fixed cost = Total cost – Variable cost element

= $24,750 – ($1.25 per unit × 15,000 units)

= $24,750 – $18,750

= $6,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

30) Dacosta Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   6,000 units   7,000 units
Direct materials $ 369,600   $ 431,200  
Direct labor $ 309,600   $ 361,200  
Manufacturing overhead $ 919,800   $ 937,300  

 

The best estimate of the total monthly fixed manufacturing cost is:

  1. A) $1,599,000
  2. B) $1,664,350
  3. C) $814,800
  4. D) $1,729,700

 

Answer:  C

Explanation:  Direct materials and direct labor are both strictly variable costs in this company.

 

Variable manufacturing overhead cost per unit = Change in cost ÷ Change in activity

= ($937,300 – $919,800) ÷ (7,000 units – 6,000 units)

= $17,500 ÷ 1,000 units

= $17.50 per unit

 

Fixed cost element of manufacturing overhead = Total cost – Variable cost element

= $937,300 – (7,000 units × $17.50 per unit)

= $937,300 – $122,500

= $814,800

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

31) Seifer Inc.’s inspection costs are listed below:

 

  Units Produced   Inspection Costs
April 119     $ 8,558
May 117     $ 8,535
June 113     $ 8,415
July 125     $ 8,736
August 152     $ 9,357
September 108     $ 8,320
October 120     $ 8,603
November 192     $ 10,337

 

Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:

  1. A) $24.08 per unit plus $5,709 per month
  2. B) $67.74 per unit plus $8,858 per month
  3. C) $24.37 per unit plus $5,658 per month
  4. D) $24.01 per unit plus $5,727 per month

 

Answer:  A

Explanation:  Using Microsoft Excel, the solution is:

 

Intercept $ 5,709   Fixed cost
Slope $ 24.08   Variable cost
R2   1.00      

 

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

32) Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below.

 

  Activity   Cost
Period 1 22     $ 121
Period 2 28     $ 132
Period 3 21     $ 117
Period 4 29     $ 134

 

Using the least-squares regression method, what is the cost formula for this cost?

  1. A) Y = $75.89 + $1.02X
  2. B) Y = $72.64 + $2.13X
  3. C) Y = $ 0.00 + $5.04X
  4. D) Y = $75.50 + $2.02X

 

Answer:  D

Explanation:  Using Microsoft Excel, the slope and intercept are:

 

Intercept $ 75.50  
Slope $ 2.02  
R2   0.99  

 

Therefore, the cost formula is $75.50 per activity plus $2.02 per unit or:

Y = $75.50 + $2.02X

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

33) The management of Hamano Corporation would like for you to analyze their repair costs, which are listed below:

 

  Machine-

Hours

Repair Costs
April 4,459   $ 98,523
May 4,426   $ 98,296
June 4,493   $ 98,781
July 4,417   $ 98,207
August 4,432   $ 98,349
September 4,446   $ 98,420
October 4,489   $ 98,749
November 4,475   $ 98,654

 

Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:

  1. A) $22.11 per machine-hour plus $98,497 per month
  2. B) $7.37 per machine-hour plus $65,670 per month
  3. C) $8.19 per machine-hour plus $62,015 per month
  4. D) $7.55 per machine-hour plus $64,859 per month

 

Answer:  B

Explanation:  Using Microsoft Excel, the solution is:

 

Intercept $ 65,670   Fixed cost
Slope $ 7.37   Variable cost
R2   0.997      

 

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

34) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of $1.50 at the 15,000 unit level of activity and total expense per unit of $1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

What would be the competitor’s prediction of variable cost per unit for Matthew Corporation?

  1. A) $1.30
  2. B) $0.77
  3. C) $1.50
  4. D) $1.45

 

Answer:  A

Explanation:

  Units Total Expense  
High activity level ($1.45 per unit × 20,000 units) 20,000   $ 29,000
Low activity level ($1.50 per unit × 15,000 units) 15,000     22,500
Change 5,000   $ 6,500

 

Variable cost = Change in cost ÷ Change in activity = $6,500 ÷ 5,000 units = $1.30 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

35) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of $1.50 at the 15,000 unit level of activity and total expense per unit of $1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

What would be the competitor’s prediction of total fixed cost per period?

  1. A) $22,500
  2. B) $28,000
  3. C) $13,600
  4. D) $ 3,000

 

Answer:  D

Explanation:

  Units Total Expense  
High activity level ($1.45 per unit × 20,000 units) 20,000   $ 29,000
Low activity level ($1.50 per unit × 15,000 units) 15,000     22,500
Change 5,000   $ 6,500

 

Variable cost = Change in cost ÷ Change in activity = $6,500 ÷ 5,000 units = $1.30 per unit

 

Fixed cost element = Total cost – Variable cost element

 

= $29,000 – ($1.30 per unit × 20,000 units) = $3,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

36) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of $1.50 at the 15,000 unit level of activity and total expense per unit of $1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

What would be the competitor’s prediction of total expected costs at 18,000 units?

  1. A) $16,860
  2. B) $26,400
  3. C) $29,100
  4. D) $30,000

 

Answer:  B

Explanation:

  Units Total Expense  
High activity level ($1.45 per unit × 20,000 units) 20,000   $ 29,000
Low activity level ($1.50 per unit × 15,000 units) 15,000   $ 22,500
Change 5,000   $ 6,500

 

Variable cost = Change in cost ÷ Change in activity = $6,500 ÷ 5,000 units = $1.30 per unit

 

Fixed cost element = Total cost – Variable cost element

 

= $29,000 – ($1.30 per unit × 20,000 units) = $3,000

 

Y = a + bX = $3,000 + ($1.30 per unit × 18,000 units) = $26,400

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

37) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 

Production volume   2,000 units   4,000 units
Direct materials $ 88.40 per unit $ 88.40 per unit
Direct labor $ 20.60 per unit $ 20.60 per unit
Manufacturing overhead $ 86.90 per unit $ 55.30 per unit

 

The best estimate of the total monthly fixed manufacturing cost is:

  1. A) $221,200
  2. B) $391,800
  3. C) $173,800
  4. D) $126,400

 

Answer:  D

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × $86.90 per unit = $173,800

 

Total manufacturing overhead at 4,000 units = 4,000 units × $55.30 per unit = $221,200

 

  Units Produced Total Manufacturing Overhead
High level of activity 4,000   $ 221,200
Low level of activity 2,000     173,800
Change 2,000   $ 47,400

 

Variable cost per unit = Change in cost ÷ Change in activity

= $47,400 ÷ 2,000 units

= $23.70 per unit

 

Fixed cost = Total cost – Variable cost element

= $221,200 – ($23.70 per unit × 4,000 units)

= $221,200 – $94,800

= $126,400

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

38) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 

Production volume   2,000 units   4,000 units
Direct materials $ 88.40 per unit $ 88.40 per unit
Direct labor $ 20.60 per unit $ 20.60 per unit
Manufacturing overhead $ 86.90 per unit $ 55.30 per unit

 

The best estimate of the total variable manufacturing cost per unit is:

  1. A) $132.70
  2. B) $88.40
  3. C) $23.70
  4. D) $109.00

 

Answer:  A

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × $86.90 per unit = $173,800

 

Total manufacturing overhead at 4,000 units = 4,000 units × $55.30 per unit = $221,200

  Units Produced Total Manufacturing Overhead
High level of activity 4,000   $ 221,200
Low level of activity 2,000     173,800
Change 2,000   $ 47,400

 

Variable cost per unit = Change in cost ÷ Change in activity

= $47,400 ÷ 2,000 units

= $23.70 per unit

 

Total variable cost per unit = Direct materials per unit + Direct labor per unit + variable manufacturing overhead per unit

= $88.40 + $20.60 + $23.70

= $132.70

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

39) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 

Production volume   2,000 units   4,000 units
Direct materials $ 88.40 per unit $ 88.40 per unit
Direct labor $ 20.60 per unit $ 20.60 per unit
Manufacturing overhead $ 86.90 per unit $ 55.30 per unit

 

The best estimate of the total cost to manufacture 2,200 units is closest to:

  1. A) $396,220
  2. B) $430,980
  3. C) $361,460
  4. D) $418,340

 

Answer:  D

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × $86.90 per unit = $173,800

 

Total manufacturing overhead at 4,000 units = 4,000 units × $55.30 per unit = $221,200

 

  Units Produced Total Manufacturing Overhead
High level of activity 4,000   $ 221,200
Low level of activity 2,000     173,800
Change 2,000   $ 47,400

 

Variable cost per unit = Change in cost ÷ Change in activity

= $47,400 ÷ 2,000 units

= $23.70 per unit

 

Fixed cost = Total cost – Variable cost element

= $221,200 – ($23.70 per unit × 4,000 units)

= $221,200 – $94,800

= $126,400

 

Total variable cost per unit = Direct materials per unit + Direct labor per unit + variable manufacturing overhead per unit

= $88.40 + $20.60 + $23.70

= $132.70

 

Total cost = Total fixed cost + Total variable cost

= $126,400 + ($132.70 per unit × 2,200 units)

= $126,400 + $291,940

= $418,340

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

40) Wilson Corporation’s activity for the first six of the current year is as follows:

 

  Machine-Hours   Electrical Cost  
January 2,000     $ 1,560
February 3,000     $ 2,200
March 2,400     $ 1,750
April 1,900     $ 1,520
May 1,800     $ 1,480
June 2,100     $ 1,600

 

Using the high-low method, the variable cost per machine hour would be:

  1. A) $0.67
  2. B) $0.64
  3. C) $0.40
  4. D) $0.60

 

Answer:  D

Explanation:

  Machine-

Hours

  Electrical Cost  
High activity level (February) 3,000     $ 2,200
Low activity level (May) 1,800     $ 1,480
Change 1,200     $ 720

 

Variable cost = Change in cost ÷ Change in activity

 

Variable cost = $720 ÷ 1,200 machine-hours = $0.60 per machine-hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

41) Wilson Corporation’s activity for the first six of the current year is as follows:

 

  Machine-Hours   Electrical Cost  
January 2,000     $ 1,560
February 3,000     $ 2,200
March 2,400     $ 1,750
April 1,900     $ 1,520
May 1,800     $ 1,480
June 2,100     $ 1,600

 

Using the high-low method, the fixed portion of the electrical cost each month would be:

  1. A) $400
  2. B) $760
  3. C) $280
  4. D) $190

 

Answer:  A

Explanation:

  Machine-

Hours

  Electrical Cost  
High activity level (February) 3,000     $ 2,200
Low activity level (May) 1,800     $ 1,480
Change 1,200     $ 720

 

Variable cost = Change in cost ÷ Change in activity

 

Variable cost = $720 ÷ 1,200 machine-hours = $0.60 per machine-hour

 

Fixed cost = Total cost – Variable cost

 

Fixed cost = $2,200 – ($0.60 per machine-hour × 3,000 machine-hours) = $400

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

42) Inspection costs at one of Ratulowski Corporation’s factories are listed below:

 

  Units Produced   Inspection Costs
April 777     $ 10,176
May 807     $ 10,404
June 798     $ 10,355
July 835     $ 10,665
August 822     $ 10,542
September 795     $ 10,313
October 805     $ 10,409
November 853     $ 10,795
December 796     $ 10,310

 

Management believes that inspection cost is a mixed cost that depends on units produced.

 

Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to:

  1. A) $8.14
  2. B) $7.05
  3. C) $0.12
  4. D) $12.89

 

Answer:  A

Explanation:

  Units Produced   Inspection Cost  
High level of activity (November) 853     $ 10,795
Low level of activity (April) 777       10,176
Change 76     $ 619

 

Variable cost per unit = Change in cost ÷ Change in activity

= $619 ÷ 76 units

= $8.14 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

43) Inspection costs at one of Ratulowski Corporation’s factories are listed below:

 

  Units Produced Inspection Costs
April 777   $ 10,176
May 807   $ 10,404
June 798   $ 10,355
July 835   $ 10,665
August 822   $ 10,542
September 795   $ 10,313
October 805   $ 10,409
November 853   $ 10,795
December 796   $ 10,310

 

Management believes that inspection cost is a mixed cost that depends on units produced.

 

Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:

  1. A) $10,344
  2. B) $10,441
  3. C) $3,852
  4. D) $10,176

 

Answer:  C

Explanation:

  Units Produced   Inspection Cost  
High level of activity (November) 853     $ 10,795
Low level of activity (April) 777       10,176
Change 76     $ 619

 

Variable cost per unit = Change in cost ÷ Change in activity

= $619 ÷ 76 units

= $8.14 per unit

 

Total fixed cost = Total cost – Variable cost element

= $10,795 – ($8.14 per unit × 853 units)

= $10,795 – $6,943

= $3,852

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

44) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 

  This Year Last Year  
Units Sold   250,000     200,000
Sales $ 1,250,000   $ 1,000,000
Cost of goods sold   875,000     700,000
Gross margin   375,000     300,000
Selling and administrative expenses   222,000     210,000
Net operating income $ 153,000   $ 90,000

 

Using the high-low method of analysis, what are the company’s estimated variable selling and administrative expenses per unit?

  1. A) $0.24
  2. B) $4.17
  3. C) $0.88
  4. D) $0.96

Answer:  A

Explanation:

  Units Sold   Cost Incurred  
High activity level 250,000   $ 222,000
Low activity level 250,000   $ 210,000
Change 50,000   $ 12,000

 

Variable cost = Change in cost ÷ Change in activity = $12,000 ÷ 50,000 units = $0.24 per unit

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

45) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 

  This Year Last Year  
Units Sold   250,000     200,000
Sales $ 1,250,000   $ 1,000,000
Cost of goods sold   875,000     700,000
Gross margin   375,000     300,000
Selling and administrative expenses   222,000     210,000
Net operating income $ 153,000   $ 90,000

 

Using the high-low method of analysis, what are the company’s estimated total fixed selling and administrative expenses per year?

  1. A) $60,000
  2. B) $174,000
  3. C) $150,000
  4. D) $162,000

 

Answer:  D

Explanation:

  Units Sold   Cost Incurred  
High activity level 250,000   $ 222,000
Low activity level 200,000   $ 210,000
Change 50,000   $ 12,000

 

Variable cost = Change in cost ÷ Change in activity = $12,000 ÷ 50,000 units = $0.24 per unit

 

Fixed cost = Total cost − Variable cost

 

Fixed cost = $222,000 − ($0.24 per unit × 250,000 units) = $162,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

46) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 

  This Year Last Year  
Units Sold   250,000     200,000
Sales $ 1,250,000   $ 1,000,000
Cost of goods sold   875,000     700,000
Gross margin   375,000     300,000
Selling and administrative expenses   222,000     210,000
Net operating income $ 153,000   $ 90,000

 

What is the company’s contribution margin for this year?

  1. A) $315,000
  2. B) $(667,500)
  3. C) $375,000
  4. D) $213,000

 

Answer:  A

Explanation:

  Units Sold   Cost Incurred  
High activity level 250,000   $ 222,000
Low activity level 250,000   $ 210,000
Change 50,000   $ 12,000

 

Variable cost = Change in cost ÷ Change in activity = $12,000 ÷ 50,000 units = $0.24 per unit

 

Sales       $ 1,250,000  
Variable expenses:            
Cost of goods sold $ 875,000        
Variable selling and administrative ($0.24 per unit × 250,000 units)   60,000     935,000  
Contribution margin       $ 315,000  

 

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

47) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal $240,000. Of this amount, depreciation totals $80,000 (all fixed) and lubrication totals $72,000 (all variable). The remaining $88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals $112,000.

 

Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

The variable cost per setup for utilities is most likely closest to:

  1. A) $ 8.00 per setup
  2. B) $12.44 per setup
  3. C) $ 4.00 per setup
  4. D) $14.66 per setup

 

Answer:  A

Explanation:

  Machine setups   Utility cost
High activity level 9,000   $ 112,000
Low activity level 6,000   $ 88,000
Change 3,000   $ 24,000

 

Variable cost = Change in cost ÷ Change in activity = $24,000 ÷ 3,000 machine setups = $8.00 per setup

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

48) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal $240,000. Of this amount, depreciation totals $80,000 (all fixed) and lubrication totals $72,000 (all variable). The remaining $88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals $112,000.

 

Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

The total fixed overhead costs for Blaine Corporation are most likely closest to:

  1. A) $112,000
  2. B) $120,000
  3. C) $ 40,000
  4. D) $ 80,000

 

Answer:  B

Explanation:

  Machine setups   Utility cost
High activity level 9,000   $ 112,000
Low activity level 6,000   $ 88,000
Change 3,000   $ 24,000

 

Variable cost = Change in cost ÷ Change in activity = $24,000 ÷ 3,000 machine setups = $8.00 per setup

 

Fixed cost element = Total cost – Variable cost element

= $112,000 – ($8.00 per setup × 9,000 units) = $40,000

 

Depreciation $ 80,000
Fixed utility cost   40,000
Total $ 120,000

 

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

49) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal $240,000. Of this amount, depreciation totals $80,000 (all fixed) and lubrication totals $72,000 (all variable). The remaining $88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals $112,000.

 

Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

If 7,800 setups are projected for the next period, total expected overhead cost would be closest to:

  1. A) $156,000
  2. B) $236,000
  3. C) $214,400
  4. D) $276,000

 

Answer:  D

Explanation:

  Machine setups   Utility cost
High activity level 9,000   $ 112,000
Low activity level 6,000   $ 88,000
Change 3,000   $ 24,000

 

Variable cost = Change in cost ÷ Change in activity = $24,000 ÷ 3,000 machine setups = $8.00 per setup

Fixed cost element = Total cost – Variable cost element

= $112,000 – ($8.00 per setup × 9,000 units) = $40,000

 

Fixed costs:

Depreciation $ 80,000
Fixed utility cost   40,000
Total $ 120,000

 

Variable costs:

Lubrication ($72,000 ÷ 6,000 machine setups) $ 12
Variable utility cost   8
Total variable cost $ 20

 

Y = a + bX = $120,000 + ($20 per machine setup × 7,800 machine setups) = $276,000

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

50) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   5,000 units   6,000 units
Direct materials $ 103,500   $ 124,200  
Direct labor $ 282,500   $ 339,000  
Manufacturing overhead $ 667,000   $ 679,800  

 

The best estimate of the total monthly fixed manufacturing cost is:

  1. A) $1,098,000
  2. B) $1,053,000
  3. C) $1,143,000
  4. D) $603,000

 

Answer:  D

Explanation:  Direct materials is a variable cost.

Direct labor is usually a variable cost, but it doesn’t hurt to check.

 

Variable cost per unit = Change in cost ÷ Change in activity

= ($339,000 – $282,500) ÷ (6,000 units – 5,000 units)

= $56,500 ÷ 1,000 units

= $56.50 per unit

 

Fixed cost = Total cost – Variable cost element

= $339,000 – ($56.50 per unit × 6,000 units)

= $339,000 – 339,000

= $0

 

Manufacturing overhead:

Variable cost per unit = Change in cost ÷ Change in activity

= ($679,800- $667,000) ÷ (6,000 units – 5,000 units)

= $12,800 ÷ 1,000 units

= $12.80 per unit

Fixed cost = Total cost – Variable cost element

= $679,800 – ($12.80 per unit × 6,000 units)

= $679,800 – $76,800

= $603,000

Total fixed cost per month = $0 + $603,000 = $603,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

51) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   5,000 units   6,000 units
Direct materials $ 103,500   $ 124,200  
Direct labor $ 282,500   $ 339,000  
Manufacturing overhead $ 667,000   $ 679,800  

 

The best estimate of the total variable manufacturing cost per unit is:

  1. A) $90.00
  2. B) $77.20
  3. C) $12.80
  4. D) $20.70

 

Answer:  A

Explanation:  Note: There are several ways to compute the variable cost per unit for direct materials and direct labor.

 

Direct materials:

Variable cost per unit = Change in cost ÷ Change in activity

= ($124,200 – $103,500) ÷ (6,000 units – 5,000 units)

= $20,700 ÷ 1,000 units

= $20.70 per unit

 

Direct labor:

Variable cost per unit = Change in cost ÷ Change in activity

= ($339,000 – $282,500) ÷ (6,000 units – 5,000 units)

= $56,500 ÷ 1,000 units

= $56.50 per unit

 

Manufacturing overhead

Variable cost per unit = Change in cost ÷ Change in activity

= ($679,800- $667,000) ÷ (6,000 units – 5,000 units)

= $12,800 ÷ 1,000 units

= $12.80 per unit

 

Total variable cost per unit = $20.70 per unit + $56.50 per unit + $12.80 per unit = $90.00 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

52) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 

Production volume   5,000 units   6,000 units
Direct materials $ 103,500   $ 124,200  
Direct labor $ 282,500   $ 339,000  
Manufacturing overhead $ 667,000   $ 679,800  

 

The best estimate of the total cost to manufacture 5,300 units is closest to:

  1. A) $1,116,180
  2. B) $1,062,915
  3. C) $1,080,000
  4. D) $1,009,650

 

Answer:  C

Explanation:  Note: There are several ways to compute the variable cost per unit for direct materials and direct labor.

 

Direct materials:

Variable cost per unit = Change in cost ÷ Change in activity

= ($124,200 – $103,500) ÷ (6,000 units – 5,000 units)

= $20,700 ÷ 1,000 units

= $20.70 per unit

 

Direct labor:

Variable cost per unit = Change in cost ÷ Change in activity

= ($339,000 – $282,500) ÷ (6,000 units – 5,000 units)

= $56,500 ÷ 1,000 units

= $56.50 per unit

 

Manufacturing overhead

Variable cost per unit = Change in cost ÷ Change in activity

= ($679,800- $667,000) ÷ (6,000 units – 5,000 units)

= $12,800 ÷ 1,000 units

= $12.80 per unit

 

Total variable cost per unit = $20.70 per unit + $56.50 per unit + $12.80 per unit = $90.00 per unit

Fixed cost = Total cost – Variable cost element

= $679,800 – ($12.80 per unit × 6,000 units)

= $679,800 – $76,800

= $603,000

Total fixed cost per month = $0 + $603,000 = $603,000

Total cost = Total fixed cost + Total variable cost

= $603,000 + ($90.00 per units × 5,300 units)

= $603,000 + $477,000

= $1,080,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

53) Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:

 

  Escrows Completed   Office Expenses
April 53     $ 7,427
May 94     $ 9,201
June 37     $ 6,769
July 87     $ 8,902
August 40     $ 6,875
September 38     $ 6,797
October 82     $ 8,681
November 35     $ 6,678
December 62     $ 7,836

 

Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

 

Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to:

  1. A) $45.44
  2. B) $42.76
  3. C) $88.22
  4. D) $131.00

 

Answer:  B

Explanation:

  Escrows Completed   Office Expenses
High activity level (May) 94   $ 9,201
Low activity level (November) 35     6,678
Change 59   $ 2,523

 

Variable cost per unit = Change in cost ÷ Change in activity

= $2,523 ÷ 59 escrows

= $42.76 per escrow

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

54) Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:

 

  Escrows Completed   Office Expenses
April 53     $ 7,427
May 94     $ 9,201
June 37     $ 6,769
July 87     $ 8,902
August 40     $ 6,875
September 38     $ 6,797
October 82     $ 8,681
November 35     $ 6,678
December 62     $ 7,836

 

Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

 

Using the high-low method, the estimate of the fixed component of office expense per month is closest to:

  1. A) $7,685
  2. B) $7,182
  3. C) $6,678
  4. D) $5,182

 

Answer:  D

Explanation:

  Escrows Completed   Office Expenses
High level of activity (May) 94   $ 9,201
Low level of activity (November) 35     6,678
Change 59   $ 2,523

 

Variable cost per unit = Change in cost ÷ Change in activity

= $2,523 ÷ 59 escrows

= $42.76 per escrow

 

Total fixed cost = Total cost – Variable cost element

= $9,201 – ($42.76 per escrow × 94 escrows)

= $9,201 – $4,019

= $5,182

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

55) Electrical costs at one of Rome Corporation’s factories are listed below:

 

  Machine-Hours   Electrical Cost  
March 458     $ 1,007
April 423     $ 934
May 440     $ 979
June 409     $ 902
July 426     $ 952
August 372     $ 822
September 414     $ 926
October 431     $ 949
November 468     $ 1,025

 

Management believes that electrical cost is a mixed cost that depends on machine-hours.

 

Using the high-low method, the estimate of the variable component of electrical cost per machine-hour is closest to:

  1. A) $2.11
  2. B) $1.80
  3. C) $2.21
  4. D) $0.47

 

Answer:  A

Explanation:

  Machine-

Hours

Electrical Cost
High level of activity (November) 468   $ 1,025
Low level of activity (August) 372   $ 822
Change 96   $ 203

 

Variable cost per unit = Change in cost ÷ Change in activity

= $203 ÷ 96 machine-hours

= $2.11 per machine hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

56) Electrical costs at one of Rome Corporation’s factories are listed below:

 

  Machine-Hours   Electrical Cost  
March 458     $ 1,007
April 423     $ 934
May 440     $ 979
June 409     $ 902
July 426     $ 952
August 372     $ 822
September 414     $ 926
October 431     $ 949
November 468     $ 1,025

 

Management believes that electrical cost is a mixed cost that depends on machine-hours

 

Using the high-low method, the estimate of the fixed component of electrical cost per month is closest to:

  1. A) $822
  2. B) $743
  3. C) $38
  4. D) $944

 

Answer:  C

Explanation:

  Machine-Hours Electrical Cost
High level of activity (November) 468   $ 1,025
Low level of activity (August) 372   $ 822
Change 96   $ 203

 

Variable cost per unit = Change in cost ÷ Change in activity

= $203 ÷ 96 machine-hours

= $2.11 per machine hour

 

Total fixed cost = Total cost – Variable cost element

= $1,025 – ($2.11 per machine-hour × 468 machine-hours)

= $1,025 – $987

= $38

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

57) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit.

 

Sales volume (units)   6,000     7,000
Cost of sales $ 497,400   $ 580,300
Selling and administrative costs $ 273,600   $ 294,700

 

The best estimate of the total monthly fixed cost is:

  1. A) $875,000
  2. B) $147,000
  3. C) $771,000
  4. D) $823,000

 

Answer:  B

Explanation:  Selling and administrative costs:

 

Variable cost per unit = Change in cost ÷ Change in activity

= ($294,700 – $273,600) ÷ (7,000 units – 6,000 units)

= $21,100 ÷ 1,000 units

= $21.10 per unit

 

Fixed cost = Total cost – Variable cost element

= $294,700 – ($21.10 per unit × 7,000 units)

= $294,700 – $147,700

= $147,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

58) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit.

 

Sales volume (units)   6,000     7,000
Cost of sales $ 497,400   $ 580,300
Selling and administrative costs $ 273,600   $ 294,700

 

The best estimate of the total variable cost per unit is:

  1. A) $82.90
  2. B) $128.50
  3. C) $104.00
  4. D) $125.00

 

Answer:  C

Explanation:  Cost of sales:

 

Because cost of sales is a variable cost, there are several ways to compute the variable cost per unit. Here is one:

 

Variable cost per unit = Change in cost ÷ Change in activity

= ($580,300 – $497,400) ÷ (7,000 units – 6,000 units)

= $82,900 ÷ 1,000 units

= $82.90 per unit

 

Selling and administrative costs:

 

Variable cost per unit = Change in cost ÷ Change in activity

= ($294,700 – $273,600) ÷ (7,000 units – 6,000 units)

= $21,100 ÷ 1,000 units

= $21.10 per unit

 

Total variable cost per unit = $82.90 per unit + $21.10 per unit = $104.00

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

59) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit.

 

Sales volume (units)   6,000     7,000
Cost of sales $ 497,400   $ 580,300
Selling and administrative costs $ 273,600   $ 294,700

 

The best estimate of the total contribution margin when 6,300 units are sold is:

  1. A) $75,600
  2. B) $97,650
  3. C) $362,880
  4. D) $229,950

 

Answer:  D

Explanation:  Variable cost per unit = Change in cost ÷ Change in activity

 

= ($580,300 – $497,400) ÷ (7,000 units – 6,000 units)

= $82,900 ÷ 1,000 units

= $82.90 per unit

 

Selling and administrative costs:

 

Variable cost per unit = Change in cost ÷ Change in activity

= ($294,700 – $273,600) ÷ (7,000 units – 6,000 units)

= $21,100 ÷ 1,000 units

= $21.10 per unit

 

Total variable cost per unit = $82.90 per unit + $21.10 per unit = $104.00

 

Contribution margin per unit = Selling price per unit – Variable cost per unit

= $140.50 per unit – $104.00 per unit

= $36.50 per unit

 

Total contribution margin = Contribution margin per unit × Unit sales

= $36.50 per unit × 6,300 units

= $229,950

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

60) The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

 

  Machine-Hours   Overhead Cost  
Jan 150,000     $ 339,000
Feb 140,000     $ 339,000
Mar 160,000     $ 350,000
Apr 130,000     $ 319,500
May 170,000     $ 362,500
Jun 200,000     $ 400,000

 

Assume that the relevant range includes all of the activity levels mentioned in this problem

 

If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method?

  1. A) $212,750
  2. B) $359,750
  3. C) $382,750
  4. D) $381,700

 

Answer:  C

Explanation:

  Machine- Hours Overhead Cost  
High activity level (Jun) 200,000   $ 400,000
Low activity level (Apr) 130,000   $ 319,500
Change 70,000   $ 80,500

 

Variable cost = Change in cost ÷ Change in activity = $80,500 ÷ 70,000 MHs = $1.15 per MH

 

Fixed cost element = Total cost – Variable cost element
= $400,000 – ($1.15 per MH × 200,000 MHs) = $170,000

 

Y = a + bX= $170,000 + ($1.15 per MH × 185,000 MHs) = $382,750

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

61) The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

 

  Machine- Hours   Overhead Cost  
Jan 150,000     $ 339,000
Feb 140,000     $ 339,000
Mar 160,000     $ 350,000
Apr 130,000     $ 319,500
May 170,000     $ 362,500
Jun 200,000     $ 400,000

 

Assume that the relevant range includes all of the activity levels mentioned in this problem.

 

What is Casablanca’s independent variable?

  1. A) the year
  2. B) the machine hours
  3. C) the total overhead cost
  4. D) the relevant range

 

Answer:  B

Explanation:  The independent variable is the measure of activity which is machine-hours in this case.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

62) Hiss Corporation’s activity for the last six months is as follows:

 

  Machine Hours   Electrical Cost
July 2,000     $ 1,560
August 3,000     $ 2,230
September 2,400     $ 1,750
October 1,900     $ 1,520
November 1,800     $ 1,450
December 2,100     $ 1,600

 

Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:

  1. A) $0.40
  2. B) $0.65
  3. C) $0.70
  4. D) $0.67

 

Answer:  B

Explanation:

  Machine-Hours Electrical Cost  
High activity level (August) 3,000   $ 2,230
Low activity level (November) 1,800   $ 1,450
Change 1,200   $ 780

 

Variable cost = Change in cost ÷ Change in activity

 

Variable cost = $780 ÷ 1,200 machine-hours = $0.65 per machine-hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

63) Hiss Corporation’s activity for the last six months is as follows:

 

  Machine Hours   Electrical Cost
July 2,000     $ 1,560
August 3,000     $ 2,230
September 2,400     $ 1,750
October 1,900     $ 1,520
November 1,800     $ 1,450
December 2,100     $ 1,600

 

Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:

  1. A) $260
  2. B) $235
  3. C) $280
  4. D) $800

 

Answer:  C

Explanation:

  Machine-Hours Electrical Cost  
High activity level (August) 3,000   $ 2,230
Low activity level (November) 1,800   $ 1,450
Change 1,200   $ 780

 

Variable cost = Change in cost ÷ Change in activity

 

Variable cost = $780 ÷ 1,200 machine-hours = $0.65 per machine-hour

 

Fixed cost = Total cost − Variable cost

 

Fixed cost = $2,230 − ($0.65 per machine-hour × 3,000 machine-hours) = $280

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

64) Jorgenson Corporation has provided the following data for the first five months of the year:

 

  Machine Hours   Lubrication Cost
January 240     $ 1,500
February 320     $ 1,600
March 400     $ 1,740
April 300     $ 1,580
May 340     $ 1,680

 

Using the high-low method of analysis, the estimated variable lubrication cost per machine hour is closest to:

  1. A) $1.50
  2. B) $1.25
  3. C) $0.67
  4. D) $1.40

 

Answer:  A

Explanation:

  Machine-Hours Electrical Cost
High activity level (March) 400   $ 1,740
Low activity level (January) 240   $ 1,500
Change 160   $ 240

 

Variable cost = Change in cost ÷ Change in activity = $240 ÷ 160 machine hours = $1.50 per machine hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

65) Jorgenson Corporation has provided the following data for the first five months of the year:

 

  Machine Hours   Lubrication Cost
January 240     $ 1,500
February 320     $ 1,600
March 400     $ 1,740
April 300     $ 1,580
May 340     $ 1,680

 

Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

  1. A) $1,120
  2. B) $1,140
  3. C) $1,170
  4. D) $1,130

 

Answer:  B

Explanation:

  Machine-Hours Lubrication Cost
High activity level (March) 400   $ 1,740
Low activity level (January) 240   $ 1,500
Change 160   $ 240

 

Variable cost = Change in cost ÷ Change in activity = $240 ÷ 160 machine hours = $1.50 per machine hour

 

Fixed cost = Total cost – Variable cost

 

Fixed cost = $1,740 – ($1.50 per machine hour × 400 machine hours) = $1,140

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

66) Jorgenson Corporation has provided the following data for the first five months of the year:

 

  Machine- Hours Lubrication Cost  
January 240 $ 1,500
February 320 $ 1,600
March 400 $ 1,740
April 300 $ 1,580
May 340 $ 1,680

 

Using the least-squares regression method of analysis, the estimated variable lubrication cost per machine hour is closest to:

  1. A) $0.80
  2. B) $1.56
  3. C) $1.40
  4. D) $1.28

 

Answer:  B

Explanation:  The regression line is Y = 1,121.18 + 1.5588X and the R2 is 0.9607.

 

Therefore, the variable cost per machine hour for lubrication is closest to $1.56.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

67) Jorgenson Corporation has provided the following data for the first five months of the year:

 

  Machine-Hours   Lubrication Cost
January 240     $ 1,500
February 320     $ 1,600
March 400     $ 1,740
April 300     $ 1,580
May 340     $ 1,680

 

Using the least-squares regression method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

  1. A) $1,050
  2. B) $1,060
  3. C) $1,121
  4. D) $1,144

 

Answer:  C

Explanation:  The regression line is Y = 1121.2 + 1.5588X and the R2 is 0.9607.

 

Therefore, the fixed component of lubrication cost is closest to $1,121.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

68) Lacourse Inc.’s inspection costs are listed below:

 

  Units Produced Inspection Costs
January 647 $ 15,309
February 724 $ 15,965
March 694 $ 15,715
April 645 $ 15,271
May 696 $ 15,745
June 665 $ 15,442
July 718 $ 15,933
August 699 $ 15,739

 

Management believes that inspection cost is a mixed cost that depends on units produced.

 

Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to:

  1. A) $22.80
  2. B) $8.82
  3. C) $8.27
  4. D) $8.78

 

Answer:  B

Explanation:  Using Microsoft Excel functions, the solution is: Variable cost per unit produced = Slope = $8.82

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

69) Lacourse Inc.’s inspection costs are listed below:

 

  Units Produced Inspection Costs
January 647 $ 15,309
February 724 $ 15,965
March 694 $ 15,715
April 645 $ 15,271
May 696 $ 15,745
June 665 $ 15,442
July 718 $ 15,933
August 699 $ 15,739

 

Management believes that inspection cost is a mixed cost that depends on units produced.

 

Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to:

  1. A) $9,608
  2. B) $15,640
  3. C) $9,587
  4. D) $15,271

 

Answer:  C

Explanation:  Using Microsoft Excel functions, the solution is:

 

Fixed cost per month = Intercept = $9,587

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

70) Recent maintenance costs of Divers Corporation are listed below:

 

  Machine-Hours   Maintenance Costs  
February 527     $ 5,144
March 499     $ 5,033
April 542     $ 5,220
May 541     $ 5,196
June 489     $ 4,973
July 543     $ 5,200
August 558     $ 5,288
September 513     $ 5,060

 

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

 

Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to:

  1. A) $9.76
  2. B) $6.00
  3. C) $4.43
  4. D) $4.57

 

Answer:  C

Explanation:  Using Microsoft Excel functions, the solution is:

 

Maintenance cost per machine-hour = Slope = $4.43

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

71) Recent maintenance costs of Divers Corporation are listed below:

 

  Machine-Hours   Maintenance Costs  
February 527     $ 5,144
March 499     $ 5,033
April 542     $ 5,220
May 541     $ 5,196
June 489     $ 4,973
July 543     $ 5,200
August 558     $ 5,288
September 513     $ 5,060

 

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

 

Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:

  1. A) $5,139
  2. B) $2,806
  3. C) $4,973
  4. D) $2,738

 

Answer:  B

Explanation:  Using Microsoft Excel functions, the solution is:

 

Fixed maintenance cost per month = Intercept = $2,806

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

72) Grawburg Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

 

  Calls Taken Call Center Cost
April 9,030 $ 112,323
May 9,017 $ 112,278
June 9,035 $ 112,341
July 9,065 $ 112,458
August 9,015 $ 112,290
September 9,061 $ 112,419
October 9,070 $ 112,463
November 9,067 $ 112,439

 

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken.

 

Required:

Estimate the variable cost per call and fixed cost per month using the least-squares regression method.

 

Answer:  Using Microsoft Excel functions, the solution is:

 

Variable cost per call = Slope = $3.27

 

Fixed cost per month = Intercept = $82,758

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

73) Furlan Printing Corp., a book printer, has provided the following data:

 

  Titles Printed Press Setup Cost
May 40   $ 6,649
June 38   $ 6,438
July 25   $ 5,307
August 28   $ 5,564
September 33   $ 6,030
October 27   $ 5,505
November 39   $ 6,551
December 36   $ 6,275

 

Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a “title”. Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.)

 

Required:

Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method.

 

Answer:  The solution using Microsoft Excel functions is:

 

Variable cost per title printed = Slope = $88.21

Fixed cost per month = Intercept = $3,107

The solution using the formulas in the text is:

n = 8

ΣX = 266

ΣY = $48,319

ΣXY = $1,628,085

ΣX2 = 9,088

b = [n(ΣXY) − (ΣX)(ΣY)]/[n(ΣX2) − (ΣX)2]

= [8($1,628,085) − (266)($48,319)]/[8(9,088) − (266)2]

= $88.21

a = [(ΣY) − b(ΣX)]/n

= [($48,319) − $88.21(266)]/8

= $3,107

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

74) The management of Rutledge Corporation would like to better understand the behavior of the company’s warranty costs. Those costs are listed below for a number of recent months:

 

  Product Returns Warranty Cost
March 30   $ 3,648
April 37   $ 4,074
May 43   $ 4,460
June 41   $ 4,330
July 32   $ 3,756
August 48   $ 4,782
September 35   $ 3,932
October 33   $ 3,823

 

Management believes that warranty cost is a mixed cost that depends on the number of product returns.

 

Required:

Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method.

 

Answer:  The solution using Microsoft Excel functions is:

 

Variable cost per product return = Slope = $63.59

Fixed cost per month = Intercept = $1,724

The solution using the formulas in the text is:

n = 8

ΣX = 299

ΣY = $32,805

ΣXY = $1,242,995

ΣX2 = 11,441

b = [n(ΣXY) − (ΣX)(ΣY))]/[n(ΣX2) − (ΣX)2]

= [8($1,242,995) − (299)($32,805))]/[8(11,441) − (299)2]

= $63.59

a = [(ΣY) − b(ΣX)]/n

= [($32,805) − $63.59(299)]/8

= $1,724

Any difference in the solutions is due to rounding errors when the formulas are used.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

 

 

75) Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

 

  Activity Cost
Period 1 46   $ 791
Period 2 40   $ 738
Period 3 47   $ 807
Period 4 41   $ 746

 

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

 

Answer:  The solution using Microsoft Excel functions is:

 

Variable cost = Slope = $9.57

 

Fixed cost = Intercept = $354.31

 

Therefore, the cost formula is $354.31 per period plus $9.57 per unit of activity or:

 

Y = $354.31 + $9.57X

 

The solution using the formulas in the text is:

 

n = 4

ΣX = 174

ΣY = 3,082

ΣXY = 134,421

ΣX^2 = 7,606

b = [n(ΣXY)-(ΣX)(ΣY)]/[n(ΣX^2)-(ΣX)^2]

= [4(134,421)-(174)(3,082)]/[4(7,606)-(174)^2]

= $9.57 (rounded to nearest whole cent)

a = [(ΣY)-b(ΣX)]/n

= [(3,082)- 9.57(174)]/4

= $354 (rounded to nearest whole dollar)

 

Cost formula: Y = $354 + $9.57X.

 

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

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